Question

On January 1, 2021, Gundy Enterprises purchases an office building for $360,000, paying $60,000 down and borrowing the remaining $300,000, signing a 7%, 10-year mortgage. Installment payments of $3,483.25 are due at the end of each month, with the first payment due on January 31, 2021.
Required:
a. Record the purchase of the building on January 1, 2015.
b. Record the first monthly mortgage payment on January 31, 2015. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan?
c. Total payments over the 10 years are $417,990 ($3,483.25 x 120 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Answer 1

Answer:

A.Dr Building $360,000

Cr Cash $60,000

Cr Notes Payable $300,000

B.Dr Interest Expense $1,750

Dr Notes Payable $1,733.25

Cr Cash $3,483.25

C.$117,990

Explanation:

Grundy Enterprises

1/1/18

Cash Paid/monthly payment

Interest Expense/carrying value

Decrease in Carrying Value

Carrying Value/prior carrying value- $300,000

1/31/18

Cash Paid/Monthly Payment - $3,483.25

Interest Expense/Carrying Value - $1,750.00

Decrease in Carrying Value - $1,733.25

Carrying Value/Prior Carrying Value - (300,000- 1,733.25) $298,266.75

2/28/18

Cash Paid/Monthly Payment - $3,483.25

Interest Expense/Carrying Value - $1,739.89

Decrease in Carrying Value - $1,743.36

Carrying Value/Prior Carrying Value - $296,523.39

A. Preparation of the entry to record the purchase of the building on January 1, 2015.

Dr Building $360,000

Cr Cash $60,000

Cr Notes Payable $300,000

B. Preparation to Record the first monthly mortgage payment on January 31, 2015 and How much of the first payment goes to interest expense and the carrying value of the loan

Dr Interest Expense $1,750

Dr Notes Payable $1,733.25

Cr Cash $3,483.25

C. Calculation of How much of this is interest expense and how much is actual payment of the loan.

Total Paid: $417,990

Less: Principal Balance: ($300,000)

Amount of Interest Paid: $117,990