Question

1. HEMI took out a mortgage of $150,000,000 on September 1, 2019 to purchase the land and building (noted in the Capital Assets section above). This amount has been recorded in the Mortgage Payable general ledger account. Accountant has recorded the blended interest and principal monthly payments in the Interest Expense general ledger account. You have been provided with the following amortization schedule for the mortgage payable:

Month	Opening balance	Interest expense	Payment	Closing balance
September, 2019	150,000,000	525,000	1,532,976	148,992,024
October, 2019	148,992,024	521,472	1,532,976	147,980,520
November, 2019	147,980,520	517,932	1,532,976	146,965,476
December, 2019	146,965,476	514,379	1,532,976	145,946,879
Total		2,078,783	6,131,904

The Accountant wants you to complete the following:

1. Using the above amortization schedule, calculate the total principal reduction in the 2019 fiscal year (show your calculations).
2. Provide an adjusting journal entry to move the amount you computed in Part (a) above from Interest Expense to reduction in Mortgage Payable.

$12,500,000 of mortgage principal will be paid in the next 12 months. Provide an adjusting journal entry to move this amount to Current Portion of Mortgage Payable account

Answer 1

a) Total principal reduction in the 2019 fiscal year can be calculated in two ways such as by: --> Subtracting the Closing balance in December, 2019 of loan payble from Opening balance in September, 2019 --> Subtracting total Interest expense from total payment made between Sep. 2019 and Dec. 2019. Opening balance of loan payable in September, 2019 Closing balance of loan payable in December, 2019 Total principal reduction in the 2019 fiscal year $150,000,000 $145,946,879 $4,053,121 ($150000000 - $145946879] Alternatively, Total payments made between Sep. 2019 & Dec. 2019 Total interest expense between Sep. 2019 & Dec. 2019 Total principal reduction in the 2019 fiscal year $6,131,904 $2,078,783 $4,053,121 ($6131904 - $2078783]

b) When accountant recorded entire payment amount as interest expense, the interest expense account would have been debited by total payments made between Sep. 2019 & Dec. 2019. So, in order to reverse the excess debit to interest expense account with respect to total principal reduction in the 2019 fiscal year, interest expense account shall be credited and mortgage loan payable account shall be debited by $4053121. Therefore, adjusting entry shall be: Credit Date Account Titles and Explanation Dec. 31, Mortgage loan payable 2019 Interest expense Debit $4,053,121 [Ref: Part-(a)] $4,053,121 No Entry is required for reclassifying long-term debt into current portion of long-term debt because it is just a re-classification on firm's balance sheet only. Total mortgage loan payable balance will continue as same figure but reported by splitting the same into current portion and long-term portion on firm's balance sheet as at December 31, 2019.