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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

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?

Computing the debt to equity ratio

Jackson Corporation has the following amounts as of December 31, 2018.

Total assets $ 55,250

Total liabilities 22,750

Total equity 32,500

Compute the debt to equity ratio on December 31, 2018.

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company’s carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company’s gain or loss on the retirement of the bonds

payable.

Determining bond prices

Bond prices depend on the market rate of interest, stated rate of interest, and time.

Determine whether the following bonds payable will be issued at face value, at a

premium, or at a discount:

a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate

of 7.75%.

b. Austin issued 9% bonds payable when the market interest rate was 8.25%.

c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.

d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At

issuance, the market interest rate was 10.25%.

Determining the present value of bonds payable and journalizing using the effective-interest amortization method

Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest rate at the date of issuance was 10%, and the bonds pay interest semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.
See all solutions

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