Chapter 12: 5RQ (page 654)
What is the difference betwee the stated interest rate and the market interest rate?
The stated and market interest rates are different in many ways. Both play a vitol role in the bond market.
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Journalizing liability transactions and reporting them on the balance
sheet
The following transactions of Johnson Pharmacies occurred during 2018 and 2019:
2018
Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires
payments due annually, on March 1. Each payment consists of \)30,000 principal
plus one year’s interest.
Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage
requires monthly payments of \)8,000. The interest rate on the note is 12% and
accrues monthly. The first payment is due on January 1, 2019.
31 Recorded interest accrued on the Saputo Bank note.
31 Recorded interest accrued on the Coconut Creek Bank note.
2019
Jan. 1 Paid Saputo Bank monthly mortgage payment.
Feb. 1 Paid Saputo Bank monthly mortgage payment.
Mar. 1 Paid Saputo Bank monthly mortgage payment.
1 Paid first installment on note due to Coconut Creek Bank.
Requirements
1. Journalize the transactions in the Johnson Pharmacies general journal. Round to
the nearest dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on
March 1, 2019 after all the journal entries are recorded.
How does compound interest differ from simple interest?
Accounting for long-term notes payable transactions
Consider the following note payable transactions of Caleb Video Productions.
2018
Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% note
payable. The note requires annual principal payments of \)16,000 plus
interest each October 1.
Dec. 31 Accrued interest on the note payable.
2019
Oct. 1 Paid the first installment on the note.
Dec. 31 Accrued interest on the note payable.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Caleb Video Productions’ total
liabilities on December 31, 2019?
Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodBrad Nelson, Inc. issued \(600,000 of 7%, six-year bonds payable on January 1, 2018.
The market interest rate at the date of issuance was 6%, and the bonds pay interestsemiannually.
Learning Objectives 2, 3, 4
3. June 30, 2018, InterestExpense \)25,200
Learning Objectives 2, 3, 4
June 30, 2018, Interest Expense$37,750
C H A P T E R 1 2
Requirements
1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)
2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.
Determining bond amounts
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payableat 99.5. Interest is paid semiannually.
Requirements
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
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