Question

Ste. Anne Corp. obtained a 10-year, 5%, $129,000 mortgage loan to finance the purchase of a building at December 31, 2017. The terms provide for semi-annual instalment payments on June 30 and December 31.

Record the first two instalment payments on June 30, 2018, and December 31, 2018, assuming the payment is (1) a fixed principal payment of $6,450 plus interest, and (2) a blended principal and interest payment of $8,275

(1) Fixed principal payment

First Instalment June 30

Second Instalment Dec. 31

(2) Blended principal and interest payment

First Instalment June 30

Second Instalment Dec. 31

Answer 1

1. Fixed principal payment

30th June 2018 Interest expense a/c Dr 3,225   

Loan a/c Dr 6,450

To cash a/c Cr 9,675

(Being principal of 6,450 and interest of (129,000 x 5% x 6/12 = 3,225) is paid on 30th june 2018 as first installment)

31st December 2018 Interest expense a/c Dr 3,063.75   

Loan a/c Dr 6,450

To cash a/c Cr 9,513.75

(Being principal of 6,450 and interest of ((129,000-6450) x 5% x 6/12 = 3,063.75) is paid on 31st December 2018 as second installment)

2. Blended principal and interest payment

30th June 2018 Interest expense a/c Dr 3,225   

Loan a/c Dr 5,050

To cash a/c Cr 8,275

(Being interest of (129,000 x 5% x 6/12 = 3,225) & the remaining balance as principal repayment (8275-3225= 5,050) is paid on 30th june 2018 as first installment)

31st December 2018 Interest expense a/c Dr 3,098.75   

Loan a/c Dr 5,176.25

To cash a/c Cr 8,275

(Being interest of ((129,000-5050) x 5% x 6/12 = 3,098.75) & the remaining balance as principal repayment (8275-3098.75 = 5,176.25) is paid on 31st December 2018 as second installment)

Note: Interest on second installment is calculated on outstanding loan amount= Loan liability - principal repayment in first installment)