Question

Monty Corp. receives $180,000 when it issues a $180,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2019. The terms provide for annual installment payments of $30,000 on December 31. Prepare the journal entries to record the mortgage loan and the first two payments. (Round answers to 0 decimal places, e.g. 15,250. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Answer:

December 31, 2019

Dr. Cash                       $180,000

Cr. Mortgage Payable $180,000

December 31, 2020

Dr. Mortgage Payable $12,000

Dr. Interest Expense   $18,000

Cr. Cash                       $30,000

December 31, 2021

Dr. Mortgage Payable $13,200

Dr. Interest Expense   $16,800

Cr. Cash                       $30,000

Explanation:

Mortgage Loan

Installment of Mortgage loan includes the interest expense and principal value. As Cash of $180,000 received, so we need to debit the cash with this value. On the other hand there is a liability arise from this event. A mortgage payable account will be credited because it has credit nature.

First Loan Payment

Installment Payment = $30,000

Interest portion of Installment = $180,000 x 10% = $18,000

Interest portion of Installment = $30,000 - $18,000 = $12,000

First Loan Payment

Installment Payment = $30,000

Interest portion of Installment = ($180,000-12,000) x 10% = $16,800

Interest portion of Installment = $30,000 - $16,800 = $13,200