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Chapter 12: Q11RQ (page 654)
In regard to a bond discount or premium, what is the straight-line amortization
method?
Allocating equal discount or premium over the interest period is the straight-line amortization method.
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Accounting for mortgages payable
Ember Company purchased a building with a market value of \(280,000 and land with
a market value of \)55,000 on January 1, 2018. Ember Company paid \(15,000 cash and
signed a 25-year, 12% mortgage payable for the balance.
Requirements
1. Journalize the January 1, 2018, purchase.
2. Journalize the first monthly payment of \)3,370 on January 31, 2018. (Round to the
nearest dollar.)
What is a mortgage payable?
What does it mean when a company calls a bond?
Bond prices depend on the market rate of interest, stated rate of interest,and time.
Requirements
1. Compute the price of the following 8% bonds of Country Telecom.
a. \(100,000 issued at 75.25
b. \)100,000 issued at 103.50
c. \(100,000 issued at 94.50
d. \)100,000 issued at 103.25
2. Which bond will Country Telecom have to pay the most to retire at maturity?
Explain your answer.
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?
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