Question

On December 31, 2019, ABC Corporation purchased a building costing $500,000, signing a 8%, 5 year mortgage note payable on December 31, 2019. Five ANNUAL payments will be made each year to pay back the mortgage beginning on December 31, 2020.

1. What is the annual installment payment required at a 10% rate?

2. Give the general journal entry to record the purchase of the building

3. Prepare an effective interest amortization table for the five years

4. Give the general journal entries to record each of the five mortgage

   payments beginning on December 31, 2019.

Answer 1

1.

Annual Installment using PMT function in excel

At 10% rate = $ 131,898.74 per annum
At 8% rate = $ 125,228.23

2.

Debit Building Account $ 500,000
Credit Note Payable $ 500,000

3.

This is at 10%

Year	Opening	Installment	Interest	Principal	Closing
			Opening X 10%	Installment - Interest	Opening - Principal
					$                   500,000
1	$              500,000	$    131,899	$              50,000	$                         81,899	$                   418,101
2	$              418,101	$    131,899	$              41,810	$                         90,089	$                   328,013
3	$              328,013	$    131,899	$              32,801	$                         99,097	$                   228,915
4	$              228,915	$    131,899	$              22,892	$                       109,007	$                   119,908
5	$              119,908	$    131,899	$              11,991	$                       119,908	$                                -

This is at 8%

Year	Opening	Installment	Interest	Principal	Closing
			Opening X 8%	Installment - Interest	Opening - Principal
					$                   500,000
1	$              500,000	$    125,228	$              40,000	$                         85,228	$                   414,772
2	$              414,772	$    125,228	$              33,182	$                         92,046	$                   322,725
3	$              322,725	$    125,228	$              25,818	$                         99,410	$                   223,315
4	$              223,315	$    125,228	$              17,865	$                       107,363	$                   115,952
5	$              115,952	$    125,228	$                9,276	$                       115,952	$                                -

4.

Journal Entries (at 8% as per rate of the Note)

Year	Accounts	Debit	Credit
1	Interest Expense	$   40,000.00
	Installment Note Payable	$   85,228.23
	Cash		$ 125,228.23
2	Interest Expense	$   33,181.74
	Installment Note Payable	$   92,046.49
	Cash		$ 125,228.23
3	Interest Expense	$   25,818.02
	Installment Note Payable	$   99,410.20
	Cash		$ 125,228.23
4	Interest Expense	$   17,865.21
	Installment Note Payable	$ 107,363.02
	Cash		$ 125,228.23
5	Interest Expense	$     9,276.16
	Installment Note Payable	$ 115,952.06
	Cash		$ 125,228.23