Question

Lucky Company borrowed $1,000,000 on December 31, 2017, by issuing $1,000,000, 8% mortgage note payable. The terms call for annual installment payments of $150,000 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, 2019.

Answer 1

(A) The below are journal entries and their workings :

(1) 12/31/17On borrowing

Bank A/c Dr 1,000,000

Note Payable Cr 1,000,000

(2) 12/31/18 Interest Due

Interest Expense A/c Dr 80,000 (i.e. 8% of 1,000,000)

Interest Payable Cr 80,000

(3) 12/31/18 Payment of Installment

Note Payable Dr 70,000

Interest Payable Dr 80,000

Bank A/c Cr 150,000

(4) 12/31/19 Interest due

Interest Expense A/c Dr 74,400 (i.e. 8% of 1,000,000-70,000)

Interest Payable Cr 74,400

(5) 12/31/19  Payment of Installment

Note Payable Dr 75,600

Interest Payable Dr 74,400

Bank A/c Cr 150,000

(B)

Total Liability of Mortgage Note as on 12/31/2019 = 1,000,000-70,000-75,600=854,400

Current Liability = Amount payable till 12/31/20 i.e. within 1 year = 150,000 ( inst.) - 854,400*8% = 81,648

Long Term Liability = 854,400- 81,648 =772,752.