Question

AWL also received a $10,000,000 mortgage at 4% was received from the bank on February 28, 20X1 to pay for the warehouse. The mortgage required monthly payments of $101,246 on the last day of each month commencing March 31, 20X1.

We calculated at the end of the period AWL had a mortgage payable of

xx	Payment	Interest	Principal	Balance
Feb28				100,000
Mar31	101,246	33,333	67,913	9,932,087
Apr30	101,246	33,107	68,139	9,863,948
May31	101,246	32,880	68,366	9,795,582
June30	101,246	..	..	..
July31	101,246	..	..	..
Aug31	101,246	..	..	..
Sep30	101,246	..	..	..
Oct31	101,246	..	..	..
Nov30	101,246	..	..	..
Dec31	101,246	31,269	69,977	9,310,569

Total interest = 323,056

Instead, AWL recorded a mortgage payable amount of 8,987,550. They took the payments, multiplied it by 10, and subtracted from total mortgage payable.

The thing is, 10,000,000 - 101,246*10 = 8,987,540 so they accidentally overrecorded their mortgage payable by 10.

Amount that's supposed to be in mortgage payable: 9,310,569
Amount that's in mortgage payable: 8,987,550
Difference: 323,046

Adjusting Entries:
DR Interest Expense 323,056
CR Mortgage Payable 323,046

What do I do with the difference of 10???

Answer 1

Here, the problem is with the wrong debit of mortgage payable instead of interest expense.

The amount in mortgage payable at Dec. 31 is $8,987,550.

If the entire installments are debited to Mortgage Payable, the balance that should be in Mortgage Payable should be,

$10,000,000 - ($101,246 x 10) = $10,000,000 - $1,012,460 = $8,987,540

But there is under posting to mortgage payable. That is Cash payment would have been shown less by $10 and correspondingly Mortgage payable was also short of $10.

The rectification entry would be,

DR Interest Expense $323,056

CR Mortgage Payable $323,046

CR Cash $10

The mortgage schedule is as follows: