Question

On December 31, 2016, ABC Corporation purchased a building costing $300,000, signing a 10%, 5-year mortgage note payable on December 31, 2016. Five ANNUAL payments will be made each year to pay back the mortgage beginning on December 31, 2017.

REQUIRED:

A. What is the annual installment payment required at a 10% rate? (3 pts)

B. Give the general journal entry to record the purchase of the building (2 pts)

C. Prepare an effective interest amortization table for the five years (5 pts)

D. Give the general journal entries to record each of the five mortgage payments beginning on December 31, 2017.

Please be as detailed with your answers, but make it as simple as possible to understand.

Answer 1

Answer A: Annual Installment payment = $79,139

This is calculated using PMT function of Excel.

Answer B

31-12-2016	Building	Dr	3,00,000
	Note Payable	Cr		3,00,000

Answer C:

Effective interest amortization Table:

Year	Beginning Balance	Interest Expense	Installment Payment	Ending Balance
2017	3,00,000	30,000	79,139	2,50,861
2018	2,50,861	25,086	79,139	1,96,808
2019	1,96,808	19,681	79,139	1,37,349
2020	1,37,349	13,735	79,139	71,945
2021	71,945	7,194	79,139	-

Answer D:

30-12-2017	Note Payable	Dr	49,139
	Interest Expense	Dr	30,000
	Cash	Cr		79,139
30-12-2018	Note Payable	Dr	54,053
	Interest Expense	Dr	25,086
	Cash	Cr		79,139
30-12-2019	Note Payable	Dr	59,458
	Interest Expense	Dr	19,681
	Cash	Cr		79,139
30-12-2020	Note Payable	Dr	65,404
	Interest Expense	Dr	13,735
	Cash	Cr		79,139
30-12-2021	Note Payable	Dr	71,945
	Interest Expense	Dr	7,194
	Cash	Cr		79,139