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Chapter 12: Q2SE_1 (page 655)

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.)

Short Answer

Expert verified
  1. The building and land is debited with the amount of $280,000 and $55,000. Cash and mortagages payable is creadited with $15,000 and $320,0000
  2. The mortgages payable is debited with $3,370 and cash account is credited with $3,370.

Step by step solution

01

Definition of mortgages

A mortgage is a type of long-term loan used to purchase a house of land.

02

Journal entry

Date

Particulars

Debit

Credit

January 1, 2018

Building

$280,000

Land

$55,000

Cash

$15,000

Mortagages payable (B.F)

$320,000

(To record purchase of building and land)

January 31, 2018

12% Mortgages Payable

$3,370

Cash

$3,370

(To record the payment of interest)

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Most popular questions from this chapter

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?

In regard to a bond discount or premium, what is the effective-interest amortization

method?

Determining the present value of bond at issuance

On December 31, 2018, when the market interest rate is 12%, Benson Realty issues

$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.

Determine the present value of the bonds at issuance.

Why would a company choose to issue bonds instead of issuing stock?

Weaver Corporation includes the following selected accounts in its general ledger on December 31, 2018:

Notes Payable (long-term) \( 75,000 Interest Payable (due next year) \) 720

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Accounts Payable 20,400 Premium on Bonds Payable 5,850

Salaries Payable 1,680 Estimated Warranty Payable 1,080

Prepare the liabilities section of Weaver Corporation’s balance sheet at December 31, 2018.
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