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Chapter 12: Q18E_1 (page 658)

Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% notepayable. The note requires annual principal payments of \)16,000 plusinterest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions’ totalliabilities on December 31, 2019?

Short Answer

Expert verified
  • The cash account is debited with $80,000, and the payable bond account is credited with $80,000.
  • Interest expenses debited by $1,600 and interest payable credited by $1,600.
  • Interest expenses, interest payable and notes payable are debited by $1,600, $4,800 and $16,000 respectively. The cash credited by $22,400.
  • Interest expenses debited by $1,280 and interest payable credited by $1,280.

Step by step solution

01

Journal entries and the payment of interest

Date

Particulars

Debit

Credit

October 1, 2018

Cash

$80,000

8% Bonds Payable

$80,000

(Being issue entry of the bonds)

December 31, 2018

Interest Expense

$1,600

Interest Payable

$1,600

(To record accrued interest)

October 1, 2019

Interest Expense

$4,800

Interest Payable

$1,600

8% Notes Payable

$16,000

Cash

$22,400

(Being entry of the first instalment with interest)

December 31, 2019

Interest Expense

$1,280

Interest Payable

$1,280

(To record accrued interest)

02

Working Notes:

Calculation of interest expenses on December 31, 2018:

InterestExpense=NotesPayable×InterestRate×Period=$80,000×8%×312=$1,600

Calculation of interest expenses on October 31, 2019:

InterestExpense=NotesPayable×InterestRate×Period=$80,000×8%×912=$4,800

Calculation of interest expenses on October 31, 2019:

InterestExpense=RemainingNotesPayable×InterestRate×Period=$80,000-$16,000×8%×312=$1,280

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Most popular questions from this chapter

Determining the present value of bonds payable and journalizing

using the effective-interest amortization method

Brad Nelson, Inc. issued $600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, 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 and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year’s interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.

Journalizing bond issuance and interest payments

On June 30, Parker Company issued 11%, five-year bonds payable with a face value

of $120,000. The bonds are issued at face value and pay interest on June 30 and

December 31.

Requirements

1. Journalize the issuance of the bonds on June 30.

2. Journalize the semiannual interest payment on December 31

What is an annuity?

Determining the present value of bonds payable

Interest rates determine the present value of future amounts. (Round to the nearest

dollar.)

Requirements

1. Determine the present value of 10-year bonds payable with face value of $86,000

and stated interest rate of 14%, paid semiannually. The market rate of interest is

14% at issuance.

2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.

3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.
See all solutions

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