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Chapter 12: Q13RQ (page 654)
What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or subtracted from the Bonds Payable account to determine the carrying amount?
The premium on bonds payable is known as the excess amount over the face value of the bond.
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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):
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?
Preparing an amortization schedule and recording mortgages payable
entries
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.
What is a bond payable?
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.
Analyzing and journalizing bond transactions
On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bondspayable with face value of $400,000. The bonds pay interest on June 30 andDecember 31. The issue price of the bonds is 104.
Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interestpayment has already been recorded.
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