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Chapter 14: Q7Q (page 753)
Differentiate between a fixed-rate mortgage and a variable-rate mortgage.
In a fixed-rate mortgage, there is a uniform rate of interest during the entire lending period. On the other hand, in a variable-rate mortgage, the rate of interest changes with time.
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Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.
Instructions
(Amortization Schedule—Effective-Interest) Assume the same information as E14-6.
Instructions
Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)
On January 1, 2017, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.
Instructions
(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)
(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.
On December 31, 2017, Hyasaki Corporation has the following account balance:
Bonds payable, due January 1, 2026 \(2,000,000
Discount on bonds payable \) 88,000
Interest payable $ 80,000
Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.
On January 1, Martinez Inc. issued \(3,000,000, 11% bonds for \)3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:
(a) \(3,185,130. (c) \)3,173,550.
(b) \(3,184,500. (d) \)3,165,000.
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