Question

1. iovett Electron . Dovet Electronics issues a $400,000,8%, 10-year mortgage note on December 31, 2011. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $29,433. Payments are due June 30 and December 31. Instructions (a) Prepare an installment payments schedule for the first 3 years. (b) Prepare the entries for (1) the loan and (2) the first two installment payments. Dallem 7. Acal Company issued $400,000,9%, 20-year bonds on January 1, 2012, at 103. Inter- est is payable semiannually on July 1 and January 1. ACME uses straight-line amortization for bond premium or discount.

problem 1

Answer 1

Solution

Lovett Electronics

1. Instalment payment schedule for the first three years:

Semi-annual interest period	Cash Payment	Interest Expense	Reduction of Principal	Principal Balance
Dec 31, 2011				$400,000
June 30, 2012	$29,433	$16,000	$13,433	$386,567
Dec 31, 2012	$29,433	$15,463	$13,970	$372,597
June 30, 2013	$29,433	$14,904	$14,529	$358,068
Dec 31, 2013	$29,433	$14,323	$15,110	$342,958
June 30, 2014	$29,433	$13,718	$15,715	$327,243
Dec 31, 2014	$29,433	$13,090	$16,343	$310,900

Computations:

1. Interest expense = principal balance x 8% x ½

Interest expense on June 30, 2012 = 400,000 x 8% x ½ = $16,000

Reduction of principal = cash payment – interest expense

= 29,433 – 16,000 = 13,433

Principal balance = beginning principal balance – reduction of principal

= 400,000 – 13,433 = $386,567

Dec 31, 2012 –

Interest expense = 386,567 x 8% x 6/12 = 15,463

Reduction of principal = 29,433 – 15,463 = $13,970

Principal balance = 386,567 – 13,970 = $372,597

June 30, 2013 –

Interest expense = 372,597 x 8% x 6/12 = 14,904

Reduction of principal = 29,433 – 14,904 = $14,529

Principal balance = 372,597 – 14,529 = $358,068

Computations for subsequent semi-annual interest dates are computed based on the above given formulas.

2. Entries for the loan and the first two instalment payments:

date	Account Titles and Explanation	Debit	Credit
Dec 31, 2011	Cash	$400,000
	Mortgage Note Payable		$400,000
	(To record issue of mortgage note)
June 30, 2012	Interest Expense	$16,000
	Mortgage Note Payable	$13,433
	Cash		$29,433
	(To record first instalment payment)
Dec 31, 2012	Interest Expense	$15,463
	Mortgage Note Payable	$13,970
	Cash		$29,433
	(To record second instalment payment)