Question

On December 31, 2009, Beam, Inc., borrowed $650,000 on an 8%, 10-year mortgage note payable. The note is to be repaid in equal quarterly installments of $23,761 (beginning March 31, 2010). Prepare journal entries to reflect (a) the issuance of the mortgage note payable, (b) the payment of the first installment on March 31, 2010, and (c) the payment of the second installment on June 30, 2010. Round amounts to the nearest dollar.

Answer 1

Part a

Date - December 31, 2009

Debit : Cash $650,000

Credit : Mortgage note payable $650,000

Part b

Date - March 31, 2010

Debit : Mortgage note payable $10,761.00

Debit : Interest expense $13,000.00

Credit : Cash $23,761.00

Part c

Date - June 30, 2010

Debit : Mortgage note payable $10,976.22

Debit : Interest expense $12,784.78

Credit : Cash $23,761.00

Step-by-step explanation:

At inception the Mortgage is initially measured at Fair Value, that is at the amount given by the Lender.

Mortgage payments would then include interest payments and capital repayments.

Preparing an amortization schedule would give us all the details required for this Mortgage.

Using a financial calculator, first set the data as follows :

PV = $650,000

I = 8%

P/YR = 4

N = 10 x 4 = 40

PMT = - $23,761

FV = $0

Then, prepare the amortization schedule for the mortgage note payable.

Date Capital Repayment Interest Payment Balance

Dec 31 - 09 $ 0 $ 0 $650,000.00

Mar 31 - 10 $10,761.00 $13,000.00 $639,239.00

June 30 - 10 $10,976.22 $12,784.78 $628,262.78