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Chapter 14: Q7Q (page 753)

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

Short Answer

Expert verified

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.

Step by step solution

01

Meaning of Mortgage

A mortgage is a loan that is used to clear off a portion of the value of the property. It is compliance made between the lender and the borrower. The borrower obtains money from the lender to clear property and pays along with interest over a specified time period till the lender has been paid completely.

02

Difference between a fixed-rate mortgage and a variable-rate mortgage

Fixed-rate mortgages and variable-rate mortgages differ on the following grounds:

  • The fixed-rate mortgage starts with a higher rate of interest, but the remittance could be lower than for a variable-rate mortgage in the coming years of the tenure of the loan. Whereas the remittances and the rate of interest can be lower than with fixed-rate mortgages in the initial period.
  • Payments will be uniform throughout the tenure of the loan. On the other hand, payments could significantly increase and also become exorbitant, depending on the economy.

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Most popular questions from this chapter

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

  1. Prepare the journal entries on Vargo’s books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust’s books on December 31, 2017, 2018, 2019.

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.
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