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Chapter 14: Q18Q (page 753)

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

Short Answer

Expert verified

The difference between the fixed rate mortgage and the variable rate mortgage is in respect of the interest rate.

Step by step solution

01

Definition of Mortgage Loan

A mortgage loan can be defined as a loan provided against an immovable or fixed asset. A fixed asset backs this loan, and the loan amount is provided as a specific percentage of the fair value of the fixed asset.

02

Differentiate between the fixed rate mortgage and variable rate mortgage

Under a fixed asset rate mortgage, the interest rate is decided when the loan is taken anddoes not change up to the whole life of the loan.

Under a variable rate mortgage, the interest rate charged on the loanchanges over the life of the loan.

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Most popular questions from this chapter

Find the polynomials q(x)andr(x)such that f(x)=g(x)q(x)+r(x),andr(x)ordegr(x)<degg(x):

(a)f(x)=3x4-2x3+6x2-x+2andg(x)=x2+x+1in鈻�[x].(b)f(x)=x4-7x+1andg(x)=2x2+1in鈻�[x].(c)f(x)=2x4+x2-x+1andg(x)=2x-1in鈻�5[x].(d)f(x)=4x4+2x3+6x2+4x+5andg(x)=3x2+2in鈻�7[x].

On December 31, 2017, American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, \(3,000,000 note receivable by the following modifications:

  1. Reducing the principal obligation from \)3,000,000 to \(2,400,000.
  2. Extending the maturity date from December 31, 2017, to January 1, 2021.
  3. Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays \)2,400,000 in cash to American Bank.

Instructions

  1. Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
  2. Can Barkley Company record a gain under the term modification mentioned above? Explain.
  3. Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
  4. Prepare the interest payment entry for Barkley Company on December 31, 2019.
  5. What entry should Barkley make on January 1, 2021?

On January 1, 2017, Ellen Carter Company makes the two following acquisitions.

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)337,012.
  2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank

Instructions

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

Describe the two criteria for determining the valuation of financial assets.

On March 1, 2017, Sealy Company sold its 5-year, $1,000 face value, 9% bonds dated March 1, 2017, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2017. Sealy uses the effective-interest method of amortization. The bonds can be called by Sealy at 101 at any time on or after March 1, 2018.

Instructions

a. (1) How would the selling price of the bond be determined?

(2) Specify how all items related to the bonds would be presented in a balance sheet prepared immediately after the bond issue was sold.

b. What items related to the bond issue would be included in Sealy鈥檚 2017 income statement, and how would each be determined?

c. Would the amount of bond discount amortization using the effective-interest method of amortization be lower in the second or third year of the life of the bond issue? Why?

d. Assuming that the bonds were called in and redeemed on March 1, 2018, how should Sealy report the redemption of the bonds on the 2018 income statement?
See all solutions

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