Question

L010-4 EXERCISE 10.6 Use of an Amortization Table 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. Prepare 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.) 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 pay ments is the same.

can someone please show me how this is done??

Answer 1

Answer :

1. Amortization Table

Interest Period (Monthly)	Payment Date	Monthly Payment	Interest Expense @ 1%per month (1% of Mortgage liability’s unpaid balance)	Reduction in Unpaid Balance	Mortgage liability’s unpaid balance
Year 1, January	January 1				$1,50,000
February	February 1	$1543	$1500	$43	$1,49,957
March	March 1	$1543	$1499.57 (or $1500 approx.)	$43.43 (or $43)	$1,49,913.57 (or $1,49,914)

2. Journal Entry for second monthly payment.

Date	Particulars	Folio No.	Debit Amount ($)	Credit Amount($)
March 1	Interest Expense A/c Dr. Mortgage Liability Installment A/c Dr.           To Cash/Bank A/c (Being interest and installment related to Mortgage Liability paid as above.)		$1500 $43	$1543

3. Monthly Interest increase, more or less will remain the same over the life of the loan which can be clearly seen from the above amortization table.

The amount of principal included in the first two payments /Installment is same approximately and will remain same for up to certain period which is just coincidence of mathematical calculation of Loan Repayment Table. There is no specific reason for it.