Question

Cullumber Co. receives $343,800 when it issues a $343,800, 10%, mortgage note payable to finance the construction of a building at December 31, 2020. The terms provide for annual installment payments of $57,300 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. Record journal entries in the order presented in the problem.)

Answer 1

Answer:

See the journal entries below.

Explanation:

The journal entries will look as follows:

Date           Description                                Debit ($)          Credit ($)    

31 Dec 20   Cash                                           343,800

                   Mortgage note payable                                     343,800

                   (To record the issue of mortgage note.)                                 

31 Dec 21    Interest expense (w.1)                 34,380

                   Mortgage note payable (w.2)     22,920

                   Cash                                                                     57,300

                   (To record the first annual installment on Mortgage note.)    

31 Dec 22   Interest expense (w.4)                 32,088

                   Mortgage note payable (w.5)       25,212

                   Cash                                                                     57,300

                   (To record the second annual installment on Mortgage note.)    

Workings:

w.1. Interest expense on December 31, 2021 = Mortgage loan amount * Interest rate = $343,800 * 10% = $34,380

w.2. Principal paid on December 31, 2021 = Annual installment payments - Interest expense on December 31, 2021 = $57,300 - $34,380 = $22,920

w.3 Mortgage loan balance on December 31, 2021 = Mortgage loan amount - Principal paid on December 31, 2021 = $343,800 - $22,920 = $320,880

w.4. Interest expense on December 31, 2022 = Mortgage loan balance on December 31, 2021  * Interest rate = $320,880 * 10% = $32,088

w.5. Principal paid on December 31, 2022 = Annual installment payments - Interest expense on December 31, 2022 = $57,300 - $32,088 = $25,212