A corporation borrowed money from a bank to build a building. The long-term note

Question

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan where such payment includes annual interest. Which of the following relationships can you expect to apply to the situation? The entire balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. The portion of the annual payment applied to the loan principal will decrease each period. The balance of mortgage payable will decrease each period the loan is outstanding. The amount of annual interest expense will increase over the 10-year period.

Explanation / Answer

c The balance of Mortgage payable will decrease each eriod the loan is outstanding since

The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.

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