answerEffective-interest amortization method
As per effective method of amortization, the amount of discount or premium is allocated as follows
:
As per generally accepted accounting principles (GAAP), interest expenses for bond is calculated by effective-interest method of amortization.
Effective-interest method of amortization is amortization model that apportions the amount of bond discount or premium based on the market interest rate at the time of issue.
Accounting for a long-term note payable
On January 1, 2018, Lakeman-Fay signed a $1,500,000, 15-year, 7% note. The loan required Lakeman-Fay to make annual payments on December 31 of $100,000 principal plus interest.
Requirements
Journalize the issuance of the note on January 1, 2018.
Journalize the first note payment on December 31, 2018.
Note-Payable with interest
Notes payable is the amount borrowed by the company from the bank and repaid after a certain period of time with payment of interest. Repayment of principal amount may be at the end of the period or a yearly payment depending upon the terms. Company records the transaction at the end of the each period.
Given,
Company signed a 15 year, 7% note payable on january 1, 2018, of $1,500,000. The note requires annual principal payments each December 31 of $100,000 plus 7% interest.
Prepare the following journal to record the issuance of note:
Date
Accounts
DR. (S)
CR. (S)
Jan,1
Cash
1,500,000
Notes payable
1,500,000
(Received cash in exchange of note)
Cash is received in exchange of notes payable, so cash account is debited and notes payable liabilities is raised.
Prepare the following journal to record the payment on December, 31,2018
Date
Accounts
DR.(S)
CR.(S)
Dec,31
Notes payable
100,000
Interest expenses
105,000
Cash
205,000
(To pay the interest and annual installment)
Payment of interest and first installment of $100,000 is made, so notes payable is reversed by $100,000 and interest expense is booked and cash is credited with the cumulative amount.
Compute the amount of repayment as on December, 31,2018 as follows:
Repayment Amount = Principal payment + Interest payment
= $100,000+($1,500,000*7%)
= $100,000+$105,000
= $205,000
Accounting for mortgages payable
Ember Company purchased a building with a market value of $280,000 and land with a market value of $55,000 on January 1, 2018. Ember Company paid $15,000 cash and signed a 25-year, 12% mortgage payable for the balance.
Requirements
Journalize the January 1, 2018, purchase.
Journalize the first monthly payment of $3,370 on January 31, 2018. (Round to the nearest dollar.)
Mortgages payable:
Mortgages payable are the long-term liabilities secured with specific assets. If the mortgage is not paid on schedule time, secured asset will be transferred to the bank, If the mortgage is to be paid within 1 year then it will be considered as current liability and in other case it will be long-term.
Given,
Ember Company purchased a building with a market value of $280,000 and
Land with a market value of $55,000 on January 1, 2018. Ember Company paid $15000 cash and signed a 25-year 12% mortgage payable for the balance.
Prepare the following journal to record the purchase on January 1 2018.
Date
Accounts
DR.(S)
CR.(S)
Jan,1
Building
28000
Land
55000
Mortgages payable
320000
Cash
15000
(Purchased building and land with a mortgage payable)
Land and building are purchased with a cash payment of $15000 and with a mortgage payable for the balance amount , so Building and land is debited, cash is credited and mortgages payable liabilities is raised.
Prepare the following journal to record the first monthly payment of $3,370 on January,31,2018
Date
Accounts
DR.(S)
CR.(S)
Jan,31
Mortgages payable
170
Interest expense($320000*12%*1month)
3200
Cash
3370
(To pay the interest and annual installment)
Payment is made for the first month which is inclusive of interest, interest expense is calculated and booked, cash is credited and mortgage liability is reversed for the balance amount.