Question

Problem One:  

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.

Required:

(1) 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.

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

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

Answer 1

Q. 1)

a.

1^st October to 28^th February is a gap of 5 months.

Interest expense = Mortgage loan × Rate × (5/12)

                            = $458,800 × 12% × (5/12)

                            = $22,940

Adjusting Journal Entry (AJE)

Date	Account titles & explanation	P.ref	Debit	Credit
28/2/2018	Interest expense		$22,940
	Interest payable			$22,940
	To record matching interest expense at the year end

b.

28^th February to 1^st April is a gap of 1 month.

Interest expense = Mortgage loan × Rate × (1/12)

                            = $458,800 × 12% × (1/12)

                            = $4,588

Mortgage loan payable = $40,000 – (Interest expense + Interest payable)

                                       = 40,000 – (4,588 + 22,940)

                                       = 40,000 – 27,528

                                       = $12,472

Journal Entry

Date	Account titles & explanation	P.ref	Debit	Credit
1/04/2018	Interest expense		$4,588
	Interest payable		$22,940
	Mortgage loan payable		$12,472
	Cash			$40,000
	To record payment of first interest & principal payment

c.

Second payment:

Interest expense = (Mortgage loan – 1^st principal payment) × Rate × (6/12)

                            = $(458,800 – 12,472) × 12% × (6/12)

                            = $446,328 × 12% × (6/12)

                            = $26,779.68

Mortgage loan payable = $40,000 – $26,779.68 = $13,220.32

Journal Entry

Date	Account titles & explanation	P.ref	Debit	Credit
30/09/2018	Interest expense		$26,779.68
	Mortgage loan payable		$13,220.32
	Cash			$40,000
	To record payment of second interest & principal payment

2.

Balance sheet (Partial)

As at 28/02/2018

Assets	Liabilities	Amount
	Long-term liabilities:
	Mortgage loan payable	$458,800
	Current liabilities:
	Interest payable	$22,940

3.

Number of period for payment = Year × Number of payment in a year

                                                     = 10 × 2

                                                     = 20

Total payment = $40,000 × 20 = $800,000

Total interest expense = Total payment – Mortgage loan amount

                                    = $800,000 - $458,800

                                    = $341,200 (Answer)