Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations. Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value. Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate. In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium. To Journalize: Sale of the bonds.

Question

Rajiv and Laurie Amin are recent college graduates looking to purchase a new home. They are purchasing a $200,000 home by paying $20,000 down and borrowing the other $180,000 with a 30-year loan secured by the home. The Amins have the option of (1) paying no discount points on the loan and paying interest at 3 percent or (2) paying 1 discount point on the loan and paying interest of 2.5 percent. Both loans require the Amins to make interest-only payments for the first five years. Unless otherwise stated, the Amins itemize deductions irrespective of the amount of interest expense. The Amins are in the 24 percent marginal ordinary income tax bracket. Assume the original facts, except that the amount of the loan is $300,000. What is the break-even point for the Amins for paying the point to get a lower interest rate?

Answer 1

Question

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine

The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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Rajiv and Laurie Amin are recent college graduates looking to purchase a new home. They are purchasing a $200,000 home by paying $20,000 down and borrowing the other $180,000 with a 30-year loan secured by the home. The Amins have the option of (1) paying no discount points on the loan and paying interest at 3 percent or (2) paying 1 discount point on the loan and paying interest of 2.5 percent. Both loans require the Amins to make interest-only payments for the first five years. Unless otherwise stated, the Amins itemize deductions irrespective of the amount of interest expense. The Amins are in the 24 percent marginal ordinary income tax bracket. Assume the original facts, except that the amount of the loan is $300,000. What is the break-even point for the Amins for paying the point to get a lower interest rate?

Can you demonstrate the accurate method for solving this financial accounting question?

I am searching for the correct answer to this general accounting problem with proper accounting rules.

Answer 2

Question

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine

The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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Answer 3

Question

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine

The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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Answer 4

Question

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine

The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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Answer 5

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

(b)

To determine

The amount of bond interest expense for first year.

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

Answer 6

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

Answer 7

Chapter 14, Problem 14.23EX

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize: Sale of the bonds.

Answer 8

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

Answer 9

b (2)

To determine

To Journalize: First semiannual interest payment and amortization of discount on bonds.

Answer 10

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

Answer 11

c (3)

To determine

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

Answer 12

(b)

To determine

The amount of bond interest expense for first year.

Answer 13

(b)

To determine

The amount of bond interest expense for first year.

Answer 14

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

Answer 15

C.

To determine

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

Answer 16

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Answer 27

Ch. 14 - Describe the two distinct obligations incurred by...Ch. 14 - Explain the meaning of each of the following terms...Ch. 14 - If you asked your broker to buy you a 12% bond...Ch. 14 - Prob. 4DQ Ch. 14 - If bonds issued by a corporation are sold at...Ch. 14 - The following data relate to a 2,000,000, 8% bond...Ch. 14 - Bonds Payable has a balance of 5,000,000, and...Ch. 14 - What is a mortgage note?Ch. 14 - Fleeson Company needs additional funds to purchase...Ch. 14 - In what section of the balance sheet would a bond...

Solution Summary: The author explains the effective-interest amortization method, which apportions the amount of bond discount or premium based on the market interest rate.

To Journalize: First semiannual interest payment and amortization of discount on bonds.

To Journalize: Second semiannual interest payment and amortization of discount on bonds.

The amount of bond interest expense for first year.

To explain: The reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

Chapter 14 Solutions