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182.
Payroll-related expenses
Shown below is a summary of the annual payroll data of Revere Ironworks:
(d) How were the costs of postretirement benefits determined? Which of these amounts
results in a liability to Revere Ironworks, and when will this liability be paid? Will the
amount of the payments be more or less than the amount now shown as a liability?
Explain.
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183.
Fully amortizing installment note payable (mortgage)
On October 31, 2015, Seldon Company incurs a 30-year $600,000 mortgage liability in
conjunction with the purchase of a motel. This mortgage is payable in equal monthly
installments of $6,485, which include interest computed at an annual rate of 12%. The first
monthly payment is made on November 30, 2015. This mortgage is fully amortizing over
360 months.
Complete the amortization table for the first two payments by entering the correct dollar
amounts in the blank spaces provided. In addition, answer the questions which follow.
(a) With respect to this mortgage, Seldon’s 2015 income statement includes interest
expense of $_______________, and Seldon’s balance sheet at December 31, 2015, includes
a total liability for this mortgage of ______________. (Do not separate into current and long-
term portions.)
(b) The aggregate monthly cash payments Seldon will make over the 30-year life of the
mortgage amount to $_______________.
(c) Over the 30-year life of the mortgage, the amount Seldon will pay for interest amounts
to $_______________.
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184.
Fully amortizing installment note payable
On October 31, 2015 Ronald signed a 2-year installment note in the amount of $50,000 in
conjunction with the purchase of equipment. This note is payable in equal monthly
installments of $2,354, which include interest computed at an annual rate of 12%. The first
monthly payment is made on November 30, 2015. This note is fully amortizing over 24
months.
Complete the amortization table for the first two payments by entering the correct dollar
amounts in the blank spaces provided. In addition, answer the questions that follow.
(a) With respect to this note, Ronald’s 2015 income statement includes interest expense of
$_______________, and Ronald’s balance sheet at December 31, 2015, includes a total
liability for this note payable of ______________. (Do not separate into current and long-
term portions.)
(b) The aggregate monthly cash payments Ronald will make over the 2-year life of the
note payable amount to $_______________.
(c) Over the 2-year life of the note, the amount Ronald will pay for interest amounts to
$_______________.
185.
Fully amortizing installment notes
When Sue Meadow purchased a home, she signed a $150,000, 12%, fully amortizing
mortgage note, payable at $1,543 per month. After making the first monthly payment,
Meadow received a notice from the bank stating that $1,500 of the payment had applied to
interest, and only $43 reduced the principal amount of the loan. Meadow does not
understand how this loan is fully amortizing over a period of 30 years. She computes that
at $43 per month, it will take approximately 3,488 months (or 290 years) to repay this loan.
Evaluate Meadow’s analysis.
186.
The LBB Company recently took a mortgage on a property for $100,000. The interest is
12% and the monthly payment is $1,020. Prepare the first four months of the amortization
table.
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187.
Bonds issued at par – basic concepts
On April 1, Year 1, Olsen Products, Inc. issued at par $25 million of 10%, 10-year bonds
payable. Interest is payable semiannually each April 1 and October 1.
(a) What is the amount of cash paid to bondholders for interest during Year 1?
$________________
(b) Give the adjusting entry necessary at December 31, Year 1 (if any), regarding this bond
issue.
(c) Interest expense on this bond issue reported in Olsen Products’ Year 1 income
statement is: $________________
(d) With respect to this bond issue, Olsen Products’ balance sheet at December 31, Year
1, includes bonds payable of $___________________ and interest payable of
$________________ (indicate $0 or “none” if the item is not reported.
(e) Give the journal entry made by Olsen Products on April 1, Year 2, to record the
semiannual payment of interest to bondholders.
188.
Bond prices after issuance
Several years ago, Clear-Air Systems issued $100 million of 30-year, 8% bonds payable at
a small premium. Since the bonds were issued, Clear-Air’s financial strength and credit
rating have actually improved, but today the bonds are trading among investors at a price
of 98.
(a) Explain the most probable reason why the market price of these bonds has declined,
even though Clear-Air‘s credit rating has improved.
(b) How will the drop in the market value of these bonds be reported (if at all) in Clear-
Air’s income statements and balance sheets? Explain.
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189.
Bonds issued at par – basic concepts
On March 1, Year 1, Hubbard Co. issued at a price of 100 $20 million of 8%, 25-year bonds
payable. Interest is payable semiannually each March 1 and September 1.
(a) What is the amount of cash paid to bondholders for interest during Year 1?
$________________
(b) Give the adjusting entry necessary at December 31, year 1 (if any), regarding this bond
issue.
(c) Interest expense on this bond issue reported in Hubbard’s Year 1 income statement is:
$________________
(d) With respect to this bond issue, Hubbard’s balance sheet at December 31, Year 1,
includes bonds payable of $________________ and interest payable of $_______________.
(Indicate $0 or “none” if the item is not reported.)
(e) Give the journal entry made by Hubbard on March 1, Year 2, to record the semiannual
payment of interest to bondholders.
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