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Chapter 12: Q21RQ (page 655)
In regard to a bond discount or premium, what is the effective-interest amortization
method?
Effective interest amotization is the method used amortize the bond by using the book value and actual interest rate.
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Preparing the liabilities section of the balance sheet
Luxury Suites Hotels includes the following selected accounts in its general ledger at
December 31, 2018:
Notes Payable (long-term) \( 200,000 Accounts Payable \) 33,000
Bonds Payable (due 2022) 450,000 Discount on Bonds Payable 13,500
Interest Payable (due next year) 1,000 Salaries Payable 2,600
Estimated Warranty Payable 1,300 Sales Tax Payable 400
Prepare the liabilities section of Luxury Suites’s balance sheet at December 31, 2018.
Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence,low-income families, and special-needs children, has a 30-year, 5% mortgageon the existing building. The mortgage requires monthly payments of \(3,000. Raffie’sbookkeeper is preparing financial statements for the board and, in doing so, lists themortgage balance of \)287,000 under current liabilities because the board hopes to beable to pay the mortgage off in full next year. Of the mortgage principal, $20,000 willbe paid next year if Raffie’s pays according to the mortgage agreement. The boardmembers call you, their trusted CPA, to advise them on how Raffie’s Kids shouldreport the mortgage on its balance sheet. What is the ethical issue? Provide and discussthe reason for your recommendation.
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.
Why would a company choose to issue bonds instead of issuing stock?
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.
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