Reference no: EM132600341
Questions -
Q1. Glen Pool Club, Inc., has a $150,000 mortgage liability. The mortgage is payable in monthly installments of $1,543, which include interest computed at an annual rate of 12 percent (1 percent monthly).
a. Describe a partial amortization table showing (1) the original balance of this loan, and (2) the allocation of the first two monthly payments between interest expense and the reduction in the mortgage's unpaid balance. (Round to the nearest dollar.)
b. Prepare the journal entry to record the second monthly payment.
c. Will monthly interest increase, decrease, or stay the same over the life of the loan? Explain your answer, including why in this case the amount of principal included in the first two payments is the same.
Q2. Bond Interest on Bonds Issued at Face Value
On March 31, 2018, Gardner Corporation received authorization to issue $50,000 of 9 percent, 30-year bonds payable. The bonds pay interest on March 31 and September 30. The entire issue was dated March 31, 2018, but the bonds were not issued until April 30, 2018. They were issued at face value.
a. Prepare the journal entry at April 30, 2018, to record the sale of the bonds.
b. Prepare the journal entry at September 30, 2018, to record the semiannual bond interest payment.
c. Prepare the adjusting entry at December 31, 2018, to record bond interest expense accrued since September 30, 2018. (Assume that no monthly adjusting entries to accrue interest expense had been made prior to December 31, 2018.)
d. Explain why the issuing corporation charged its bond investors for interest accrued in April 2018, prior to the issuance date (see part b).
Q3. Accounting for Bonds Issued at a Discount: Issuance, Interest Payments, and Retirement
Melillo Corporation issued $5 million of 20-year, 9.5 percent bonds on July 1, 2018, at 98. Interest is due on June 30 and December 31 of each year, and all of the bonds in the issue mature on June 30, 2038. Melillo's fiscal year ends on December 31. Prepare the following journal entries.
a. July 1, 2018, to record the issuance of the bonds.
b. December 31, 2018, to pay interest and amortize the bond discount.
c. June 30, 2038, to pay interest, amortize the bond discount, and retire the bonds at maturity (make two separate entries).
d. Briefly explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects.)