E12-19 Preparing an amortization schedule and recording mortgages payable entries
Learning Objective 1
3. Interest Expense $2,750.00
Kellerman Company purchased a building and land with a fair market value of $550,000
(building, $425,000, and land, $125,000) on January 1, 2018. Kellerman signed a 20-year, 6%
mortgage payable. Kellerman will make monthly payments of $3,940.37. Round to two decimal
places. Explanations are not required for journal entries.
Requirements
1. Journalize the mortgage payable issuance on January 1, 2018.
2. Prepare an amortization schedule for the first two payments.
3. Journalize the first payment on January 31, 2018.
4. Journalize the second payment on February 28, 2018.
SOLUTION
Requirement 1
Requirement 2
E12-19, cont.
Requirement 3
E12-20 Analyzing alternative plans to raise money
Learning Objective 2
EPS Plan A $1.96
SB Electronics is considering two plans for raising $4,000,000 to expand operations. Plan A is to
issue 9% bonds payable, and plan B is to issue 500,000 shares of common stock. Before any new
financing, SB Electronics has net income of $350,000 and 300,000 shares of common stock
outstanding. Management believes the company can use the new funds to earn additional income
of $700,000 before interest and taxes. The income tax rate is 30%. Analyze the SB Electronics
situation to determine which plan will result in higher earnings per share. Use Exhibit 12-6 as a
guide.
SOLUTION
E12-21 Determining bond prices and interest expense
Learning Objectives 2, 3
2. Market price $436,100
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to borrow for a
major expansion. The owner, Shane Jones, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Jones Company have total interest expense equal to the
cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be greater than
the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company expect for
the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones Company’s
interest expense be for the first year?
SOLUTION
E12-22 Journalizing bond issuance and interest payments
Learning Objective 3
2. Interest Exp. $6,600
On June 30, Parker Company issues 11%, five-year bonds payable with a face value of $120,000.
The bonds are issued at face value and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment on December 31.
SOLUTION
Requirement 1
E12-23 Journalizing bond issuance and interest payments
Learning Objective 3
1. June 30 Discount $18,200
On June 30, Daughtry Limited issues 8%, 20-year bonds payable with a face value of $130,000.
The bonds are issued at 86 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment and amortization of bond discount on December
31.
SOLUTION
Requirement 1
E12-24 Journalizing bond transactions
Learning Objective 3
2. Interest Expense $3,430
Anderson Company issued $70,000 of 10-year, 9% bonds payable on January 1, 2018. Anderson
Company pays interest each January 1 and July 1 and amortizes discount or premium by the
straight-line amortization method. The company can issue its bonds payable under various
conditions.
Requirements
1. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at face value. Explanations are not required.
2. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at 92. Explanations are not required.
3. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at 103. Explanations are not required.
4. Which bond price results in the most interest expense for Anderson Company? Explain in
detail.
SOLUTION
Requirement 1
E12-24, cont.
Requirement 3
Requirement 4
E12-25 Journalizing bond issuance and interest payments
Learning Objectives 3, 4
1. Premium $9,600
On January 1, 2018, Roberts Unlimited issues 8%, 20-year bonds payable with a face value of
$240,000. The bonds are issued at 104 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on January 1, 2018.
2. Journalize the semiannual interest payment and amortization of bond premium on June 30,
2018.
3. Journalize the semiannual interest payment and amortization of bond premium on December
31, 2018.
4. Journalize the retirement of the bond at maturity, assuming the last interest payment has
already been recorded. (Give the date.)
E12-25, cont.
SOLUTION
Requirement 1
E12-26 Retiring bonds payable before maturity
Learning Objective 4
2. Cash $606,000
CoastalView Magazine issued $600,000 of 15-year, 5% callable bonds payable on July 31, 2018,
at 94. On July 31, 2021, CoastalView called the bonds at 101. Assume annual interest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payable at July 31,
2021.
2. Assume all amortization has been recorded properly. Journalize the retirement of the bonds on
July 31, 2021. No explanation is required.
SOLUTION
Requirement 1
E12-27 Reporting current and long-term liabilities
Learning Objectives 2, 3, 5
Pediatric Dispensary borrowed $390,000 on January 2, 2018, by issuing a 15% serial bond
payable that must be paid in three equal annual installments plus interest for the year. The first
payment of principal and interest comes due January 2, 2019. Complete the missing information.
Assume the bonds are issued at face value.
December 31
2018 2019 2020
Current Liabilities:
Bonds Payable $____
__
$____
__
$____
__
Interest Payable _____
_
_____
_
_____
_
Long-term Liabilities: _____
_
_____
_
_____
_
Bonds Payable _____
_
_____
_
_____
_
SOLUTION
Requirement 1
E12-28 Reporting liabilities
Learning Objectives 2, 3, 5
Total Liabilities $378,000
At December 31, MediStat Precision Instruments owes $52,000 on Accounts Payable, Salaries
Payable of $12,000, and Income Tax Payable of $10,000. MediStat also has $300,000 of Bonds
Payable that were issued at face value that require payment of a $35,000 installment next year
and the remainder in later years. The bonds payable require an annual interest payment of
$4,000, and MediStat still owes this interest for the current year. Report MediStat’s liabilities on
its classified balance sheet on December 31, 2018.
SOLUTION