Question

1) On January 1, 2021, California Financial purchases a building for $900,000, signing a 5%, 20- year mortgage. Installment payments of $5,939.60 are due at the end of each month, with the first payment due on January 31, 2021 Required: 1. Record issuance of the mortgage installment note on January 1, 2021. 2. Record the first monthly mortgage payment on January 31, 2021. 3. Record the second monthly mortgage payment on February 28, 2021. 4. Total payments over the 20 years are $1,425,504 ($5,939.60 x 240 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Answer 1

Journal entries to be booked:

Date	Description	Debit ($)	Credit ($)
Jan 1 2021	Building	900000
	Notes payable or Mortgage Payable		900000
Jan 31 2021	Interest expense	3750
	Notes payable or Mortgage Payable	2189.6
	Cash		5939.6
Feb 28 201	Interest expense	3740.88
	Notes payable or Mortgage Payable	2198.72
	Cash		5939.6

4. Total Amount paid = $1425504

Principal repaid = $900000

Interest paid = $525504 (1425504-900000)

Notes

For such questions it is better to prepare an amortization schedule

Months	EMI	Interest	Principal	Bal.principal
	Given	principal o/s * Interest Rate	EMI - Interest	previous bal - principal repaid
0				$                                                   9,00,000
1	$   5,939.6	$                                             3,750.00	$                 2,190	$                                                   8,97,810
2	$   5,939.6	$                                             3,740.88	$                 2,199	$                                                   8,95,612
3	$   5,939.6	$                                             3,731.72	$                 2,208	$                                                   8,93,404
4	$   5,939.6	$                                             3,722.52	$                 2,217	$                                                   8,91,187
5	$   5,939.6	$                                             3,713.28	$                 2,226	$                                                   8,88,960
6	$   5,939.6	$                                             3,704.00	$                 2,236	$                                                   8,86,725
7	$   5,939.6	$                                             3,694.69	$                 2,245	$                                                   8,84,480
8	$   5,939.6	$                                             3,685.33	$                 2,254	$                                                   8,82,226
9	$   5,939.6	$                                             3,675.94	$                 2,264	$                                                   8,79,962

Please comment in case of any issue and I will be happy to help.