Question

Glen Pool Club, Inc., has a $147,000 mortgage liability. The mortgage is payable in monthly installments of $1,512, which include interest computed at an annual rate of 12 percent (1 percent monthly).

a. Prepare a partial amortization table showing (1) the original balance of this loan, and (2) the allocation of the first two monthly payments between interest expense and the reduction in the mortgage’s unpaid balance.

b. Prepare the journal entry to record the second monthly payment.

c. Will monthly interest increase, decrease, or stay the same over the life of the loan?

Answer 1

a. Prepare a partial amortization table showing (1) the original balance of this loan, and (2) the allocation of the first two monthly payments between interest expense and the reduction in the mortgage’s unpaid balance.

	Cash payment	Interest expense	Reduction in principal	Carrying value
Beginning				147000
1 month	1512	147000*12%*1/12 = 1470	42	146958
2 Month	1512	146958*12%*1/12 = 1469.58	42.42	146915.58

b) Journal entry

Date	account and explanation	debit	credit
	Interest expense	1469.58
	Mortgage payable	42.42
	Cash		1512
	(To record second monthly payment)

c) Monthly interest will decrease over the life of the loan