# Practice6 Essay

585 words - 2 pages

Problem 10.4A
a. The amount of the monthly payments exceeds the amount of the monthly interest expense.
Therefore, a portion of each payment reduces the unpaid balance of the loan. The
continuous reduction in the unpaid balance, in turn, causes the monthly interest expense to
be less in each successive month, and the amount applied to the unpaid balance to increase.
Thus, the loan principal is repaid at an ever-increasing rate.
b.
General Journal
2011
Oct 1 Interest Expense 10,800
Mortgage Note Payable 310
Cash 11,110
To record monthly payment on mortgage.
Nov 1 Interest Expense 10,797
Mortgage Note Payable 313
Cash 11,110
To record monthly mortgage payment.
c.
Amortization Table
(12%, 30-Year Mortgage Note Payable for \$1,080,000;
Payable in 360 Monthly Installments of \$11,110)
Interest
Period
Payment
Date
Monthly
Payment
Interest
Expense
Reduction in
Unpaid
Balance
Unpaid
Balance
Issue
date Sept. 1, 2011
\$ 1,080,000
1 Oct. 1 \$ 11,110 \$ 10,800 \$ 310 1,079,690
2 Nov. 1 11,110 10,797 313 1,079,377
3 Dec. 1 11,110 10,794 316 1,079,061
4 Jan. 1, 2012 11,110 10,791 319 1,078,742
d. At December 31, 2011, two amounts relating to this mortgage loan will appear as current
liabilities in the borrower's balance sheet. First, as payments are due on the first day of
each month, one month's interest has accrued since the December 1 payment. This accrued
interest will be paid on January 1, 2012, and therefore, is a current liability.
Next, the portion of the unpaid principal that will be repaid during 2012 represents a
current liability.
Problem 10.6A

a.
General Journal
(1) Bonds issued at 98:
2011
Dec 31 Bond Interest Expense 2,693,334
Discount on Bonds Payable 26,667
Bond Interest payable 2,666,667
To record accrual of bond interest expense for
four months in 2011:
Contract interest (\$80,000,000 x 10% x 4/12) \$ 2,666,667
Discount amortization (\$1,600,000 ÷ 20 years) x 4/12 26,667
Bond interest expense for four months \$ 2,693,334
2012
Mar 1 Bond Interest Payable 2,666,667
Bond Interest Expense 1,346,667
Discount on Bonds Payable 13,334
Cash 4,000,000
To record semiannual bond interest payment and
interest expense for two months (1/2 of interest for
four months, as computed in preceding entry). *
(2) Bonds issued at 101:
2011
Dec 31 Bonds Interest Expense 2,653,334
Bond Interest payable 2,666,667
Accrual of interest on bonds for four months:
Contract interest (\$80,000,000 x 10% x 4/12) \$ 2,666,667
Less: Premium amortization (\$800,000 ÷ 20 yrs) x
4/12
(13,333)
Bond interest expense for four months \$ 2,653,334
2012
Mar 1 Bond Interest Payable 2,666,667
Bond Interest Expense 1,326,667
Cash 4,000,000
Semiannual bond interest payment and interest
expense for two months (1/2 of interest for four
months, as computed in preceding entry).*
* Actual amount differs slightly due to rounding

b.
Net bond liability at Dec. 31, 2012: Bonds
Issued
at 98
Bonds
Issued
at...

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