Question

.On December 1, 2009, Fisher Corporation incurs a 30-year, $400,000 mortgage liability upon purchase of a warehouse. This mortgage is payable in monthly installments of $4,116, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2009.

1 How much of the first payment made on December 31, 2009, is allocated to repayment of principal? ___________________$

2 What is the total liability related to this mortgage to be reported in Fisher’s balance sheet at December 31, 2009? (Do not separate into current and long-term portions.)___________________$

3 The portion of the second monthly payment made on January 31, 2010, which represents interest expense is $______________

Answer 1

Installment	Date	Installment Amount	Interest	Principal	Outstanding Principal
1	31-Dec-09	4,116	4,000	116	400,000
2	31-Jan-10	4,116	3,998.84	117.16	399,884

1.

Interest = Outstanding principal * Interest rate * 1/12 Months

= 400,000 * 12% * 1/12 months

Interest = $4,000

Principal = Installment – Interest amount

= 4,116 – 4,000

Principal = $116

2.

Total Liability = Total Loan amount – Principal amount paid on December 31, 2009

= 400,000 – 116

Total Liability at December 31, 2009 = $399,884

3.

Interest Expense = Outstanding principal * Interest rate * 1/12 Months

= (400,000 – 116) * 12% * 1/12 months

Interest Expense = $3,998.84