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Chapter 12: 19E_1 (page 659)

Kellerman Company purchased a building and land with a fair market value of \(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of \)3,940.37. Round to two decimal places. Explanations are not required for journal entries.

Requirements

  1. Journalize the mortgage payable issuance on January 1, 2018.
  2. Prepare an amortization schedule for the first two payments.
  3. Journalize the first payment on January 31, 2018.
  4. Journalize the second payment on February 28, 2018.

Short Answer

Expert verified
  1. Mortgage payable is $550,000
  2. Interest expenses for the first and second months are $2,750 and $2,744.05.
  3. Cash account is credited with $3,940.37

Mortgage account is debited with $1,196.32

Step by step solution

01

Meaning of Long-term notes payable

Long-term notes payable are the company's commitments to pay back notes after one year or one operational cycle, whichever comes first. In most cases, the long-term payable is recorded within the balance sheet's long-term liabilities column.

02

(1) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 1, 2018

Building

425,000

Land

125,000

Mortgage payable

550,000

03

(2) Preparing an amortization schedule

Date

Beginning

Balance

(c-b)

Principal

amount

Interest

Expense (b)=(ax6%)

Total

Payment (c)

Ending

Balance (a)

01.01.2018

$550,000.00

01.31.2018

$550,000

$1,190.37

$2,750.00

$3,940.37

$548,809.63

02.28.2012

$548,809.63

$1,196.32

$2,744.05

$3,940.37

$547,613.31

Working notes:

Calculation of Interest expense for the first month

Interestexpense=Mortgagepayable脳Interestrate脳Timeperiod=$550,000脳6%脳112=$2,750

Calculation of Interest expense for the second month

Interestexpense=Mortgagepayable脳Interestrate脳Timeperiod=$548,809.63脳6%脳112=$2.744.05

04

(3) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 31, 2018

Mortgage

1,190.37

Interest expense

2,750.00

Cash

3,940.37

05

(4) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Feb. 28, 2018

Mortgage

1,196.32

Interest expense

2,744.05

Cash

3,940.37

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Most popular questions from this chapter

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Bond prices depend on the market rate of interest, stated rate ofinterest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?Explain your answer.

Accounting for a long-term note payable

On January 1, 2018, Lakeman-Fay signed a \(1,500,000, 15-year, 7% note. The loan

required Lakeman-Fay to make annual payments on December 31 of \)100,000

principal plus interest.

Requirements

1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first note payment on December 31, 2018.

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%.
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