Question

On 1 Oct 2017, Weez Ltd entered into a mortgage loan. The amount borrowed was $458,800 at 12% per annum, with $40,000--part interest, part principal--repayable every six months for ten years, beginning with the payment due 1 April 2018. The company has an annual accounting period ending 28 February.

Instructions:

Without narration, prepare a) the AJE on 28 Feb 2018, b) the journal entry for the $40,000 payment on 1 April 1, 2018, and c) the journal entry for the second $40,000 payment on 1 October 2018. Round to two decimal places.

Prepare the liability section of the balance sheet as at 28 February 2018.

What is the total interest expense to be recognised over the ten year term of the loan?

Answer 1

• All working forms part of the answer
• Workings

Date	Beginning Balance - Principal	Interest expense	Installment	Reduction in Principal	Ending Principal Balance
	[A]	[B = A x 12% x 6/12]	[C]	[D = C - B]	[E = A - D]
01-Oct-17					$        458,800.00
01-Apr-18	$                              458,800.00	$            27,528.00	$           40,000.00	$           12,472.00	$        446,328.00
01-Oct-18	$                              446,328.00	$            26,779.68	$           40,000.00	$           13,220.32	$        433,107.68

• Answer: Journal entries, based on above

Date	Accounts title	Debit	Credit	Working
28-Feb-18	Interest Expenses	$            22,940.00		[$ 458,800 x 12% x 5/12]
	Interest Payable		$           22,940.00
	(interest expense for 5 months recorded)
01-Apr-18	Interest Expenses	$              4,588.00		[$ 458,800 x 12% x 1/12]
	Interest Payable	$            22,940.00
	Mortgage Loan	$            12,472.00		[see Reduction in Capital column]
	Cash		$           40,000.00
	(1st Installment paid)
01-Oct-18	Interest Expenses	$            26,779.68		[See Interest expense column]
	Mortgage Loan	$            13,220.32		[see Reduction in Capital column]
	Cash		$           40,000.00
	(2nd Installment paid)

• Balance Sheet

Balance Sheet - Partial
Liabilities
Current Liabilities:
Interest payable	$            22,940.00
Mortgage payable (due in 2018)	25692.32
Total Current Liabilities		$           48,632.32
Long Term Liabilities:
Mortgage Payable		$        433,107.68
Total Liabilities		$        481,740.00

• Total Interest Expense over 10 years:

--Total payment of instalment = $ 40,000 x 10 years x 2 installment each year = $ 800,000

--Mortgage Loan amount = $ 458,800

--Total Interest expense to be recognised = 800000 – 458800 = $ 341,200