Question 1

Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

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Question 2

Sielert Corporation borrowed $1,500,000 from National Bank on May 31, 2016. The three-year, 7% note required annual payments of $571,575 beginning May 31, 2017. The total amount of interest to be paid over the life of the loan is

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Question 3

Wolford Company borrowed $2,000,000 from U.S. Bank on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must recognize on its 2017 income statement?

Accepted Answer

First, we need to calculate the interest expense for the year 2017:

Interest expense = Beginning balance of the loan x Annual interest rate
= $2,000,000 x 9.5%
= $190,000

Then, we need to calculate the amount of the annual payment that goes towards reducing the principal:

Principal payment = Annual payment - Interest expense
= $520,872 - $190,000
= $330,872

Finally, we can calculate the remaining balance of the loan after the first payment:

Remaining balance = Beginning balance - Principal payment
= $2,000,000 - $330,872
= $1,669,128

Therefore, the amount of expense Wolford must recognize on its 2017 income statement is the interest expense of $190,000.

Question 4

Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a

Accepted Answer

When a company takes out a mortgage, they are borrowing money and creating a liability. Therefore, the entry should include a credit to the Mortgage Payable account for the full amount of the mortgage ($3,360,000). The entry should also include a debit to the Cash account for the amount of cash received (which is not the full amount of the mortgage, but rather the monthly payment of $30,800). However, since the question is asking for the entry to record the mortgage (not just the first payment), the correct answer is D, a credit to Mortgage Payable for the full amount of the mortgage.

Question 5

When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the

Accepted Answer

The effective-interest method of amortization takes into account the premium or discount on the bond, which affects the carrying value of the bond. Therefore, the interest expense for an interest period is calculated by multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate.

Question 6

Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $3,112,350. The entry to record the redemption will include

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Question 7

The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that

Accepted Answer

The amortization of a bond premium reduces the amount of interest expense that is reported for each interest period. This is because the premium represents an extra cost that was paid to purchase the bond, and this cost is spread out over the life of the bond. As a result, the amount of cash to be paid for interest for the period will exceed the amount of interest expense reported on the income statement.

Question 8

Collins Company borrowed $1,250,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the amount of expense Collins must recognize on its 2017 income statement?

Accepted Answer

The interest expense that Collins will recognize on its 2017 income statement can be calculated using the following formula:
Interest expense = Beginning balance of the loan x Interest rate
= $1,250,000 x 9.5%
= $118,750

However, Collins also made a payment of $325,545 in 2017, which includes both principal and interest. The interest portion of this payment can be calculated as follows:
Interest portion of payment = Total payment - Principal portion of payment
= $325,545 - ($1,250,000 ÷ 5)
= $325,545 - $250,000
= $75,545

Therefore, the total interest expense that Collins must recognize on its 2017 income statement is the sum of the interest calculated above and the interest expense from the beginning balance of the loan:
Total interest expense = Interest from beginning balance + Interest portion of payment
= $118,750 + $75,545
= $194,295

Thus, the amount of expense Collins must recognize on its 2017 income statement is $99,105 (total interest expense minus the portion of interest included in the payment towards principal).

Question 9

Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

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Question 10

Collins Company borrowed $1,250,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2017 after the annual payment?

Accepted Answer

The correct answer is B. The balance in the notes payable account at December 31, 2017 after the annual payment is $816,765.The annual payment is $325,545. The interest expense for the year is $118,765 ($1,250,000 x 9.5%). The principal payment for the year is $206,780 ($325,545 - $118,765). The balance in the notes payable account at December 31, 2017 is $1,043,205 ($1,250,000 - $206,780).

Question 11

Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?

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Question 12

Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry to be recorded at the end of the second year for the payment of interest and the amortization of discount will include a

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The answer of Warner Company issued $5,000,000 of 6%, 10-year...

Question 13

Which of the following statements best describes the behavior over time of the components of equal mortgage payments?

Accepted Answer

In equal mortgage payments, the payment of principal gradually increases over time as the borrower pays off more of their loan balance. As the loan balance decreases, the interest expense charged on the outstanding balance also decreases. Therefore, the behavior over time is that payment of principal increases and interest expense decreases.

Question 14

Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying value of the bond was ¥59,780,000. The entry to record the retirement would include a

Accepted Answer

The carrying value of the bond was ¥59,780,000, which is less than the face amount of ¥60,000,000. Therefore, the bond was retired at a price higher than its carrying value, resulting in a gain on bond redemption of ¥980,000. The entry to record the retirement would be:

Dr. Bonds payable ¥60,000,000
Cr. Cash ¥58,800,000
Cr. Gain on bond redemption ¥1,200,000

Question 15

The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)

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Question 16

Fornelli Corporation borrowed $800,000 from Central Bank on May 31, 2016. The three-year, 7% note required annual payments of $304,840 beginning May 31, 2017. Interest expense for the year ended December 31, 2016 was

Accepted Answer

The correct answer is A because the interest expense for the year ended December 31, 2016 is $32,667. This is calculated by multiplying the principal amount of $800,000 by the annual interest rate of 7%, which is $56,000. Then, we divide this amount by 12 to get the monthly interest expense of $4,666.67. Finally, we multiply this amount by the number of months in the year ended December 31, 2016, which is 7, to get the interest expense for the year ended December 31, 2016 of $32,667.

Question 17

Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2015. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization.
Herman Company decided to redeem the bonds on January 1, 2017. What amount of gain or loss would Herman report on its 2017 income statement?

Accepted Answer

Herman issued the bonds at a discount since the coupon rate (8%) is less than the market rate. The discount is amortized over the life of the bonds using the straight-line method.
The total discount on the bonds is ₤28,750 (₤500,000 face value – ₤471,250 proceeds), which is amortized over 10 years or 20 semi-annual periods. The semi-annual amortization is ₤1,437.50 (₤28,750 ÷ 20).
As of January 1, 2017, two years or four semi-annual periods have passed since the bonds were issued. The unamortized discount is therefore ₤25,675 (16 x ₤1,437.50). The carrying amount of the bonds on January 1, 2017, is ₤474,325 (₤500,000 face value – ₤25,675 unamortized discount).
To redeem the bonds on January 1, 2017, Herman would need to pay the call price of 101, or ₤505,000 (₤500,000 face value x 101% call price).
Therefore, Herman would recognize a loss of ₤30,675 (₤505,000 payment – ₤474,325 carrying amount) on its 2017 income statement.

Question 18

Wolford Company borrowed $2,000,000 from U.S. Bank on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2017 after the annual payment?

Accepted Answer

The correct answer is B. The balance in the notes payable account at December 31, 2017 after the annual payment is $1,306,824.The annual payment is $520,872. The interest expense for the year is $190,000 ($2,000,000 x 9.5%). The principal payment for the year is $330,872 ($520,872 - $190,000). The balance in the notes payable account at December 31, 2017 is $1,669,128 ($2,000,000 - $330,872).

Question 19

Sielert Corporation borrowed $1,500,000 from National Bank on May 31, 2016. The three-year, 7% note required annual payments of $571,575 beginning May 31, 2017. Interest expense for the year ended December 31, 2016 was

Accepted Answer