Question

Dreiling Company borrowed $500,500 on January 1, 2017, by issuing a $500,500, 5% mortgage note payable. The terms call for annual installment payments of $45,500 on December 31.

Prepare the journal entries to record the mortgage loan and the first two installment payments.

Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2017.

Answer 1

A) Journal entries to record the mortgage loan and the first two installment payments:

January 1, 2017
Dr Cash	500,500
Cr Mortgage payable		500,500
[To record the issuance of mortgage note]
December 31, 2017
Dr Interest expense	25,025
Dr Mortgage payable	20,475
Cr Cash		45,500
[To record the first installment payment]
December 31, 2018
Dr Interest expense	24,000
Dr Mortgage payable	21,500
Cr Cash		45,500
[To record the second installment payment]

B) Amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2017 & December 31, 2018:

December 31, 2017
Current Liability	20,475
Long term Liability (500,500 - 20,475)	480,025
December 31, 2018
Current Liability	21,500
Long term Liability (500,500 - 20,475 - 21,500)	458,525

Working Notes:

As on December 31, 2017

Interest Expense = 500,500 * 5/100 = 25025

Mortgage Payable = 45,500 - 25,025 =20,475

As on December 31, 2018

Interest Expense = (500,500 -20,475) * 5/100 = 24,000

Mortgage Payable = 45,500 - 24,000=$21,500