Question

HW 6: Due date November 13, 2019 ) On January 1, 2021, California Financial purchases a building for S900,000, 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 (S5,939.60 x 240 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Answer 1

Solution Question #1 Cost of Building purchased Mortgage loan amount $900,000 $900,000 Rate of Interest 5% Period of loan 20 Years Monthly installment payment $5,939.60 Required 1: Journal entry to record issuance of martgage installment note General Journal Date Debit Credit 900,000.00 Jan. 01, 2021 Buildings Mortgage Payable (Notes Payable) (To record the issuance of mortgage note) $900,000.00 Required 2: Decrease in Interest Mortgage Cash Paid Mortgage Date Expense Balance Balance 1/1/2021 $900,000.00 $3,750.00 $2,189.60 1/31/2021 $5,939.60 $897,810.40 $895,611.68 2/28/2021 $5,939.60 $3,740.88 $2,198.72 Journal entry to record first monthly mortgage payment on Jan. 31, 2021 General Journal Debit Credit Date $3,750.00 $2,189.60 Interest Expense Jan. 31, 2021 Mortgage Payable (Notes Payable) Cash $5,939.60 (To record the first monthly mortgage payment) Required 3: Journal entry to record the second monthly mortgage payment on Feb. 28, 2021 General Journal Debit Credit Date Feb. 28, 2021 Interest Expense $3,740.88 Mortgage Payable (Notes Payable) $2,198.72 Cash $5,939.60 (To record the second monthly mortgage payment)

Required 4 Total payment over the 20 Years ($5,939.60 x 240) $1,425,504 ($900,000) $525,504 Less: Actual payment of loan (See Note 1) Payment of interest expense Note 1: Since the mortgage loan period is 20 years, in 20 years, the full loan shall be repaid. Interest Expense Actual payment of loan $525,504 $900,000 Question # 2 Face Value of Bonds $80,000 Issue price of Bonds $85,951 Premium on issue of Bonds ($85,951-$80,000) $5,951 Stated rate of interest 7% Market interest rate 6% Bond life 10 Years Interest payment frequency Semi-annual Total no. of interest payment till maturity (10 Years x 2) 20 Semi-annual interest payment = $80,000 x 7% x 6/12 $2,800 Required 1.: Journal entry to record the bond issue General Journal Debit Credit Date Cash Bonds Payable Jan. 1, 2021 $85,951 $80,000 Premium on Bonds Payable $5,951 (To record issuance of bonds at premium) Required 2.: Journal entry to record the first interest payment on June 30, 2021 General Journal Debit Credit Date June 30, 2021 Interest Expense ($85,951 x 6% x 6/12) Premium on Bonds Payable (Bal. fig.) Cash ($80,000 x 7% x 6/12) $2,579 $221 $2,800 (To record first interest payment and premium amortization)