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13) WhackCo began business on January 1, 2011. Show the effect of the following events:
Shareholders' equity
Assets
Liabilities
CC
Retained
earnings
1
WhackCo had sales of
$300,000 in 2011, all on
account. The cost of goods
sold was 60% of sales.
2
WhackCo expects that
warranty expenses will be
5% of sales.
Learning Objective 7-3
1) When companies borrow money for longer than one year, that obligation is called ________.
A) equity financing
B) a long-term liability
C) an operating activity
D) a current liability
2) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to
finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual
installments of $1,358,679. The first payment was made on December 31, 2011. How much of
the first mortgage payment was interest? Round your answer to the nearest dollar.
A) $1,000,000
B) $81,521
C) $1,358,679
D) $600,000
3) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to
finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual
installments of $1,358,679. The first payment was made on December 31, 2011. How much of
the first mortgage payment will be used to reduce the principal? Round your answer to the
nearest dollar.
A) $758,679
B) $1,358,679
C) $0
D) $600,000
4) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to
finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual
installments of $1,358,679. Over the 10-year period, as each installment payment is made, the
portion of the payment that is interest expense will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
5) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to
finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual
installments of $1,358,679. Over the 10-year period, as each installment payment is made, the
portion of the payment that is used to reduce the principal will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
6) On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to
finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual
installments of $1,358,679. Over the 10-year period, as each installment payment is made, the
amount that Climax Corporation will show on its balance sheet for mortgage payable will
________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
7) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy
a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. The first
payment was made on December 31, 2011. How much of the first mortgage payment was
interest? Round your answer to the nearest dollar.
A) $9,967
B) $70,000
C) $0
D) $142,378
8) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy
a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. The first
payment was made on December 31, 2011. How much of the first mortgage payment will be
used to reduce the principal? Round your answer to the nearest dollar.
A) $72,378
B) $132,412
C) $0
D) $142,378
9) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy
a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. Over the
10-year period, as each installment payment is made, the portion of the payment that is interest
expense will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
10) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to
buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. Over
the 10-year period, as each installment payment is made, the portion of the payment that is used
to reduce the principal will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
11) On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to
buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. Over
the 10-year period, as each installment payment is made, the amount that Ajax Corporation will
show on its balance sheet for mortgage payable will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
12) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy
a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the portion of the
payment that is interest expense will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
13) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy
a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the portion of the
payment that is used to reduce the principal will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
14) On January 1, 2011, Alpha Enterprise signed a $100,000, 6%, 20-year mortgage note to buy
a new warehouse. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the amount that Alpha
Enterprise will show on its balance sheet for mortgage payable will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
15) On January 1, 2011, Zenith, Inc. signed a $200,000, 5%, 20-year mortgage note to buy a new
office building. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the portion of the
payment that is interest expense will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
16) On January 1, 2011, Zenith, Inc., signed a $200,000, 5%, 20-year mortgage note to buy a
new office building. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the portion of the
payment that is used to reduce the principal will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
17) On January 1, 2011, Zenith, Inc., signed a $200,000, 5%, 20-year mortgage note to buy a
new office building. The mortgage will be repaid in a series of twenty equal annual installment
payments. Over the 20-year period, as each installment payment is made, the amount that Zenith,
Inc., will show on its balance sheet for mortgage payable will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
18) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan
will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011. On
its statement of cash flows for the year ended December 31, 2011, Ace will show cash paid for
interest as ________ activity.
A) $(9,756), an operating
B) $(2,800), a financing
C) $(9,756), a financing
D) $(2,800), an operating
19) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan
will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.
Interest expense for the year ended December 31, 2012 will be ________ interest expense for
2011.
A) higher than
B) the same as
C) lower than
D) The answer cannot be determined from the information given.
20) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan
will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.
Notes payable at December 31, 2012 will be ________ notes payable at December 31, 2011.
A) higher than
B) the same as
C) lower than
D) The answer cannot be determined from the information given.
21) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. The loan
will be repaid in 5 equal installments of $9,756 each year, beginning on December 31, 2011.
With each successive payment on the note, ________ of the payment will be applied to the loan
principal.
A) more
B) the same amount
C) less
D) The answer cannot be determined from the information given.
22) On January 1, 2011, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will
pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will
be repaid on December 31, 2015, the last interest payment date. On its statement of cash flows
for the year ended December 31, 2011, Ace will show cash paid for interest as ________
activity.
A) $(9,756), an operating
B) $(2,800), a financing
C) $(9,756), a financing
D) $(2,800), an operating
23) On January 1, 2012, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will
pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will
be repaid on December 31, 2016, the last interest payment date. Interest expense for the year
ended December 31, 2013 will be ________ interest expense for 2012.
A) higher than
B) the same as
C) lower than
D) The answer cannot be determined from the information given.
24) On January 1, 2012, Ace Electronics borrowed $40,000 on a five-year, 7% note. Ace will
pay ONLY THE INTEREST on the loan on December 31 each year. The entire principal will
be repaid on December 31, 2016, the last interest payment date. Notes payable at December 31,
2013 will be ________ notes payable at December 31, 2012.
A) higher than
B) the same as
C) lower than
D) The answer cannot be determined from the information given.
25) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7%
mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31
each year. What effect will the payments have on the accounting equation?
A) Total assets, liabilities and shareholders’ equity will all decrease.
B) Only total assets and total liabilities will decrease.
C) Only total assets and total shareholders’ equity will decrease.
D) Total liabilities will increase and total shareholders’ equity will decrease.
26) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7%
mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31
each year. After the first payment, Mortgage payable will have a balance of ________.
A) $100,000
B) $85,762
C) $92,762
D) $93,000
27) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7%
mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31
each year. After the SECOND payment, Mortgage payable will have a balance of ________
(rounded to the nearest $1).
A) $100,000
B) $85,762
C) $85,017
D) $86,000
28) B. Row, Inc. needed some long-term financing and arranged for a 10-year, $100,000, 7%
mortgage loan on January 1, 2010. Annual payments of $14,238 will be made on December 31
each year. Interest expense for the year ended December 31, 2012 will be ________ interest
expense for 2011.
A) higher than
B) the same as
C) lower than
D) The answer cannot be determined from the information given.
29) When a company borrows money for longer than one year, that obligation is called a long-
term liability.
30) Principal = rate multiplied by time multiplied by interest.
31) Each time a company makes a payment on a mortgage the amount of the payment that
reduces the principal increases.
32) Each time a company makes a payment on a mortgage interest expense will increase.
33) Monthly mortgage payments cause assets and liabilities to decrease and shareholders’ equity
to remain the same.
34) Monthly mortgage payments cause assets and liabilities to decrease and shareholders’ equity
to increase.
35) China Company borrowed $20,000 at 8% for 10 years. The loan requires annual payments of
$2,717.35. When China Company makes the first annual payment:
a. how much of the first payment will be interest?
b. how much of the first payment will be used to reduce the principal of the loan?
36) Alpha Company has arranged to borrow $30,000 for 8 years at an annual interest rate of 6%.
Annual payments of $4,831.08 will be made. When Alpha makes its first payment at the end of
the loan’s first year:
1. how much of the payment will be interest?
2. how much of the payment will be used to reduce the principal of the loan?
37) Beta Company borrowed $20,000 at 8% for 6 years. The loan requires annual payments of
$4,326.31. When Beta Company makes the first annual payment:
1. how much of the first payment will be interest?
2. how much of the payment will be used to reduce the principal of the loan?
38) On December 31, 2010, a company purchased a $100,000 building by signing a $100,000,
20-year mortgage note. The ANNUAL interest rate is 6%, with payments of $8,718 made on
December 31 each year.
Required:
1. Complete the last line of the table below. ROUND YOUR ANSWERS TO THE NEAREST
DOLLAR.
Mortgage
balance
Annual
payment
Interest portion of
payment
Amount of mortgage
reduction
Beginning
balance
$100,000
1st
$8,718
$6,000
$2,718
After 1st
payment
$97,282
2nd
$8,718
$5,837
$2,881
After 2nd
payment
$
3rd
$
$
$
2. Use the information from the previous table to complete the statements below.
Circle the name of a financial statement where needed using the following code:
IS = Income Statement for the Year Ended December 31, 2011
BS = Balance Sheet at December 31, 2011
SOCF = Statement of Cash Flows for the Year Ended December 31, 2011
AFTER THE FIRST PAYMENT IS MADE ON DECEMBER 31, 2011:
a. Mortgage payable of $______________________ will appear on the
(circle one) IS BS SOCF
b. Interest expense of $______________________ will appear on the
(circle one) IS BS SOCF
c. Cash paid for interest of $______________________ will appear on the
(circle one) IS BS SOCF as
part of (circle one) operating investing financing activities.
d. Cash paid on loan principal of $______________________ will appear on the
(circle one) IS BS SOCF as
part of (circle one) operating investing financing activities.
e. With each payment that is made, the amount of each payment that is used for interest
expense (circle one) increases decreases stays the same
f. With each payment that is made, the amount still owed on the loan, mortgage payable,
(circle one) increases decreases stays the same
g. With each payment that is made, the amount of the payment that goes toward the balance
owed on the mortgage loan (circle one) increases decreases stays the same
39) Mini Storage Company needed some long-term financing and arranged for a $100,000,
10-year mortgage loan on January 1, 2010. The annual interest rate is 9%, with a payment of
$15,582 made December 31 each year.
Required:
1. Complete the amortization schedule for the first TWO YEARS of the note.
Mortgage
balance
Annual
payment
Interest portion of
mortgage
Amount of
mortgage reduction
Beginning balance
$100,000
1st
$
$
$
After 1st payment
$
2nd
$
$
$
2. Complete the table below for the first TWO YEARS of the note. Fill in the correct dollar
amount AND put an X in the appropriate box to indicate the financial statement where the
amount will be found.
Amount
At or for the Year
ended 12/31/10
Amount
At or for the YEAR
ended 12/31/11
IS
BS
SOCF
Interest expense
$
$
Notes payable
$
$
Cash paid on loan principal
$
$
Cash paid for loan interest
$
$
40) Ace Electronics, Inc. needed some long-term financing and arranged for a 20-year, $200,000,
8% mortgage loan on January 1, 2011. Equal annual payments of $20,370 will be made on
December 31 each year.
Required:
a. Record the FIRST LOAN PAYMENT made on December 31, 2011 in the accounting
equation below. Fill in both the correct dollar AMOUNT and the LETTER of the account title
from the list of accounts below.
A. Cash C. Interest payable E. Interest income
B. Interest expense D. Notes payable
Shareholders' equity
Assets
Liabilities
CC
Retained earnings
b. Fill in the correct dollar amount AND put an X in the appropriate box to indicate the financial
statement where the amount will be found.
Amount
At or for the Year
ended 12/31/11
Amount
At or for the YEAR
ended 12/31/12
IS
BS
SOCF
Notes payable
$
$
Interest expense
$
$
41) Stephen’s Storage Company needed some long-term financing and arranged for a 20-year,
$100,000, 9% mortgage loan on January 1, 2011. Annual payments of $10,955 will be made on
December 31 each year.
Part A: Prepare an amortization schedule for the first two loan payments:
Mortgage
balance
Annual
payment
Interest
portion of
mortgage
Amount of
mortgage
reduction
Beginning
balance
$100,000
1st
$
$
$
After 1st
payment
$
2nd
$
$
$
Part B: Show the effect on the accounting equation of each of the events listed below:
Shareholders' equity
Assets
Liabilities
CC
Retained earnings
Jan. 1, 2011,
borrowed
$100,000
Dec. 31, 2011,
made the first
loan payment
Dec. 31, 2012
made the second
loan payment
Part C: For each item listed below, fill in the correct dollar amount in the column that represents
the financial statement where the item will appear.
Income
Statement
Statement of
Cash Flows
Balance
Sheet
1
Interest expense for 2011
2
Mortgage payable at
December 31,2011
3
Interest paid in 2011
4
Loan principal paid in 2011
5
Interest expense for 2012
6
Mortgage payable at
December 31, 2012
7
Interest paid in 2012
8
Loan principal paid in 2012
42) Ron’s Wrenches needs a new, $35,000 delivery truck. Ron sees two alternatives:
1. Buy the truck for $35,000 by signing a 5-year, 6% installment note. Monthly payments will be
$675.
2. Sign a 5-year lease to rent the truck for $650 a month. Ron’s Wrenches will not own the truck
when the lease expires.
Required:
Show the effect on the accounting equation of: a.) purchasing the truck by signing a $35,000
installment note and b.) the entry to record the first payment.
Shareholders' equity
Assets
Liabilities
CC
Retained earnings
a.
b.
c. Will leasing the truck require different entries?
d. Is it ethical for a company to acquire the use of assets by renting them?
