Question

In: Accounting

On July 1, Homer Simpson signed a 30-year home mortgage contract in the amount of $300,000....

On July 1, Homer Simpson signed a 30-year home mortgage contract in the amount of $300,000. The interest rate on the mortgage is 4.35%compounded monthly, making the monthly payments $1,493.44. The first payment is due on August 1 and the second payment is due on September 1. Homer is a dedicated accountant, so he records all of his household transactions in debit-and-credit format. The journal entry to record the second payment on September 1 includes
A DEBIT to Interest Expense of 1,087.50.
A DEBIT to Interest Expense of 1,086.03.
A DEBIT to Interest Expense of 407.41.
A DEBIT to Mortgage Payable of 1,087.50.
A DEBIT to Mortgage Payable of 1,086.03.
A DEBIT to Mortgage Payable of 405.94.

Solutions

Expert Solution

Correct answer---------A DEBIT to Mortgage Payable of 405.94.

Working

Date Mortgage beginning balance Interest on mortgage Installment Reduction mortgage payment Ending balance of mortgage
Jul-01 $ 3,00,000.00 $ 1,085.00 $ 3,01,085.00
Aug-01 $ 3,01,085.00 $ 1,088.92 $ 1,493.44 $ 404.52 $ 3,00,680.48
Sep-01 $ 3,00,680.48 $ 1,087.46 $ 1,493.44 $ 405.98 $ 3,00,274.51

Interest expense will not be recorded on 1st day of the month. Interest will be accrued and recorded on last day of month so Interest for aug will be recorded on Aug 31 which is $1087.46


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