These questions come from a practice test, so i have the answers but i would rea
ID: 2474603 • Letter: T
Question
These questions come from a practice test, so i have the answers but i would really like to know how to get them in the simplest way.
1. Mary Company purchased a building with a $10,000,000 mortgage. The monthly payments are $135,000 and the interest rate on the mortgage is 12%.
(a) The amount of the first monthly payment that will be applied toward interest would be:
c. $100,000
(b) The amount of the first monthly payment that will be applied toward principal will be:
b. $35,000
2. Bandit Company issued 50 bonds payable; $1,000 each, 9% annual interest, maturity in ten years. The bonds were sold at 96 and the market rate is 11%. The amount of interest expense in the first year using the effective interest method would be:
a. $5,280.
3. On January 1, Shell Point Shell Shop issued $1,000,000, 14%, 5-year bonds with interest payable semiannually on July 1 and December 31. The bonds sold for $1,098,540. The market rate of interest at the time of issue was 12%. On the first interest date, using the effective interest method, the amount of bond interest paid to the bondholders by Shell Point Shell Shop would be
d. $70,000
4. Jiffy Corporation issued ten-year term bonds on January 1, 20x2, with a face value of $800,000. The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest method of amortization is used.
(b)The journal entry on June 30, 20x2, to record the payment of interest and amortization of discount will include a
c. credit to Bond Discount for $3,638.
(b) The journal entry to be recorded on December 31, 20x2, for the payment of interest and the amortization of discount will include a
d. credit to Bond Discount for $3,784.
Explanation / Answer
Answer for question no.1:
Given monthly payments are=$135,000.
Interest rate on the mortagage=12%.
Amount borrowed =$10,000,000
Interest on the amount per month =($10,000,000*12%)/12
=$100,000.
So, the balance in instalment is adjusted towards the principal ie., $135,000 -$100,000 =$35,000.
Answer for question no.2:
Stated interest rate=9%.
Par value of the bonds=50 *1000=$50,000
These are sold @ $960. =960*50 =$48,000.
Market interest rate=11%.
Effective interest =$48,000*11% =$5,280.
Answer for question no.3:
Face value of the bonds =$1,000,000.
Amount of interest paid to bond holders is always the stated rate on the bonds i.e., 14%. But as the interest in paid semi annual, it is 7% ie., $1,000,000*7% =$70,000.
Answer for question no.4:
Bonds were issued at $690,960.
Fave value of the bonds=$800,000.
Effective annual rate=8%. Semi annual rate=4%.
This is applied o the book value of the bonds i.e., $690,960 *4% =$27,638.40
Interest to be paid to bond holders=$800,000 * 6%/2
=$24,000.
Credit to bond discount would be=$27,638.40 -$24,000
=$3,638.
On Decemeber 31:
Bond book value would go up by the discount written off =$3,638+$690,960=$694,598
Effective interest =4%*694,598=$27,784.
Interest paid to bond holders =$24,000
Credit to bond discount would be $27,784 -$24,000
=$3,784.
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