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Chapter 12: 19E_1 (page 659)

Kellerman Company purchased a building and land with a fair market value of \(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of \)3,940.37. Round to two decimal places. Explanations are not required for journal entries.

Requirements

  1. Journalize the mortgage payable issuance on January 1, 2018.
  2. Prepare an amortization schedule for the first two payments.
  3. Journalize the first payment on January 31, 2018.
  4. Journalize the second payment on February 28, 2018.

Short Answer

Expert verified
  1. Mortgage payable is $550,000
  2. Interest expenses for the first and second months are $2,750 and $2,744.05.
  3. Cash account is credited with $3,940.37

Mortgage account is debited with $1,196.32

Step by step solution

01

Meaning of Long-term notes payable

Long-term notes payable are the company's commitments to pay back notes after one year or one operational cycle, whichever comes first. In most cases, the long-term payable is recorded within the balance sheet's long-term liabilities column.

02

(1) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 1, 2018

Building

425,000

Land

125,000

Mortgage payable

550,000

03

(2) Preparing an amortization schedule

Date

Beginning

Balance

(c-b)

Principal

amount

Interest

Expense (b)=(ax6%)

Total

Payment (c)

Ending

Balance (a)

01.01.2018

$550,000.00

01.31.2018

$550,000

$1,190.37

$2,750.00

$3,940.37

$548,809.63

02.28.2012

$548,809.63

$1,196.32

$2,744.05

$3,940.37

$547,613.31

Working notes:

Calculation of Interest expense for the first month

Interestexpense=Mortgagepayable×Interestrate×Timeperiod=$550,000×6%×112=$2,750

Calculation of Interest expense for the second month

Interestexpense=Mortgagepayable×Interestrate×Timeperiod=$548,809.63×6%×112=$2.744.05

04

(3) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 31, 2018

Mortgage

1,190.37

Interest expense

2,750.00

Cash

3,940.37

05

(4) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Feb. 28, 2018

Mortgage

1,196.32

Interest expense

2,744.05

Cash

3,940.37

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Most popular questions from this chapter

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

S12A-13 Determining present value

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

  1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Determining bond prices and interest expense

Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to

borrow for a major expansion. The owner, Shane Jones, asks your advice on some

related matters.

Requirements

1. Answer the following questions:

a. At what type of bond price Jones Company will have total interest expense

equal to the cash interest payments?

b. Under which type of bond price will Jones Company’s total interest expense be

greater than the cash interest payments?

c. If the market interest rate is 12%, what type of bond price can Jones Company

expect for the bonds?

2. Compute the price of the bonds if the bonds are issued at 89.

3. How much will Jones Company pay in interest each year? How much will Jones

Company’s interest expense be for the first year?

Reporting liabilities on the balance sheet and computing debt toequity ratio.The accounting records of Pack Leader Wireless include the following as ofDecember 31, 2018:

Accounts Payable \( 77,000 Salaries Payable \) 7,500

Mortgages Payable (long-term) 73,000 Bonds Payable (current portion) 25,000

Interest Payable 18,000 Premium on Bonds Payable 10,000

Bonds Payable (long-term) 63,000 Unearned Revenue (short-term) 2,700

Total Stockholders’ Equity 140,000

Requirements

1. Report these liabilities on the Pack Leader Wireless balance sheet, includingheadings and totals for current liabilities and long-term liabilities.

2. Compute Pack Leader Wireless’s debt to equity ratio at December 31, 2018.

On January 1, 2018, Fox Corporation signed an \(80,000, four-year, 4% note. The loan required Fox to make payments annually

on December 31 of \)20,000 principal plus interest.

1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first payment on December 31, 2018.
See all solutions

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