Question

Required information

Problem 9-1B Record and analyze installment notes (LO9-2)

Skip to question

[The following information applies to the questions displayed below.]

On January 1, 2021, Stoops Entertainment purchases a building for $610,000, paying $110,000 down and borrowing the remaining $500,000, signing a 9%, 15-year mortgage. Installment payments of $5,071.33 are due at the end of each month, with the first payment due on January 31, 2021.

Problem 9-1B Part 3

3-a. Record the first monthly mortgage payment on January 31, 2021. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Journal entry worksheet

• Record the first monthly mortgage payment.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 31, 2021

3-b. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan? (Round your answers to 2 decimal places.)

	Interest Expense Reducing the Carrying Value First payment

4. Total payments over the 15 years are $912,839 ($5,071.33 × 180 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

	Interest expense Actual payments on the loan

Answer 1

3-a. Record the first monthly mortgage payment on January 31, 2021.

Workings:

*Calculation of Interest expense in the first installment = Principal amount x Rate x Time period

i.e. Interest amount = $500,000 x 0.09 x (1/12) = $3750

Please note that to calculate the interest for one month (1/12) has been done.

* Principal repayment on first installment = Installment - Interest

= $5071.33 - $3750 = $1321.33

3-b. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan?

As calculated above in the workings,

Interest expense in the first installment = $3750

Principal repaid/reducing the carrying value of the loan in the first installment = $1321.33

4. Total payments over the 15 years are $912,839 ($5,071.33 × 180 monthly payments). How much of this is interest expense and how much is the actual payment of the loan?

Ans. Total payment in 15 years = $ 912839 (given in the question)

Loan amount = $500,000

Interest expense = Total payments - Loan amount = $912,839 - $500,000 = $ 412,839.

OPTIONAL (LONGER) WAY TO ANSWER QUESTION 4

A better way to understand the loan payment process is through an amortization mortgage loan schedule needs to be prepared (on excel) which calculates the part of interest and principal that is being paid monthly. A snapshot of the schedule has been shown below:

How the amortization schedule has been prepared?

Steps:

1. We will start with Month 1 (i.e. January end), the beginning balance of the loan at that time was the total $500,000.

2. Installment amount will remain the same for all the 180 (15 years x 12 months per year) periods i.e. $5071.33.

3. Now the interest amount will be calculated as the beginning balance x 0.09/12 for every month.

4. The principal amount will be calculated as Installment - Interest expense of the corresponding month

5. The ending balance of the loan is the remaining amount of the loan which can be calculated as Beginning balance - Principal repayment.

6. Again for month 2, the beginning balance will be the ending balance of month 1. And the same procedure will be followed for the next 179 months.

In the end, if we sum up the installment column we will get $912,839.33 and the principal column would sum up to $500,000 (i.e. the loan amount). The summation of the interest amount is $412,839.

Therefore, answer to question 4: Of the total payment of $912,839.33, $412,839 is the interest expense and $500,000 is the actual payment on the loan.