Question

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

On January 1, 2018, Gundy Enterprises purchases an office for $316,000, paying $56,000 down and borrowing the remaining $260,000, signing a 8%, 10-year mortgage. Installment payments of $3,154.52 are due at the end of each month, with the first payment due on January 31, 2018.

Problem 9-1A Part 1

Required:

1. Record the purchase of the building on January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Problem 9-1A Part 2

2. Complete the first three rows of an amortization schedule. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Problem 9-1A Part 3

Required:

3-a. Record the first monthly mortgage payment on January 31, 2018. (If no entry is required for a 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.)

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.)

Problem 9-1A Part 4

4. Total payments over the 10 years are $378,542 ($3,154.52 × 120 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Answer 1

1.

Date	General Journal	Debit	Credit
1-Jan-18	Office	$316,000
	Cash		$56,000
	Mortgage Payable		$260,000
	(To record buying office)

2.

Amortization Schedule:
Date	Cash Paid(a)	Interest Expenses(b)	Decrease in Carrying Value(c=a-b)	Carrying Value(d-c)
1/1/2018	$0.00	$0.00	$0.00	$260,000.00
1/31/2018	$3,154.52	$1,733.33	$1,421.19	$258,578.81
2/28/2018	$3,154.52	$1,723.86	$1,430.66	$257,148.15

Working:

01/31/18:

Interest for the First month = Beginning Book Value x Monthly Interest Rate

= $260,000 × 8% × 1÷12

= $1,733.33

02/28/18:

Interest for the next month = Beginning Book Value x Monthly Interest Rate

= $258,578 × 8% × 1÷12

= $1,723.86

3.

a.

Date	General Journal	Debit	Credit
1-Jan-18	Mortgage Payable	$1,421.19
	Interest expenses	$1,733.33
	Cash		$3,154.52
	(To record first month payments)

b.

	Interest Expenses	Reducing the carrying value
First Payment	$1,733.33	$1,421.19

4.

Total Payments	$378,542.00
Actual Payment on loan	$260,000.00
Interest Expenses	$118,542.00