On January 1, 2015, Stoops Entertainment purchases a building for $520,000, payi

Question

On January 1, 2015, Stoops Entertainment purchases a building for $520,000, paying $110,000 down and borrowing the remaining $410,000, signing a 9%, 20-year mortgage. Installment payments of $3, 688.88 are due at the end of each month, with the first payment due on January 31, 2015.

1. Record journal entry for the purchase of the building on January 1, January 31, 2015.

2. Complete the first three rows of an amortization schedule.

3-a. Record the journal entry for the first monthly mortgage payment on January 31, 2015

3-b. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan?

4. Total payments over the 20 years are $885, 331($3,688.88x240 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Date Cash Paid Interest Expense Decrease in Carrying Value Carrying Value 1/1/15 01/31/15 02/28/15

Explanation / Answer

1) Journal entry

Building Dr $ 520,000

Cash Cr $ 110,000

9% Note payable Cr $ 410,000

2) Amortization Schedule

3) Journal entry for First payment

Interest expense Dr $ 3,075

9% Note payable Dr $ 613.88

Cash Cr $ 3,688.88

3) First payament

Interest expense = 3,075

Reducing Carrying Value = 613.88

4) Total Payment $ 885,331

Actual Amount on the Loan = $ 410,000

Interest expense ( 885,331 - 410,000 ) = $ 475,331

Date Cash Paid Interest Expense Decrease in Carrying Value Carrying Value 01-01-2015 0 0 0 410000.00 01/31/15 3688.88 3075 613.88 409386.12 02/28/15 3688.88 3070.40 618.48 408767.64 Interest expense Carring Value Rate Month Interest 01-01-2015 410000 9% 1 3075 28-02-2015 409386.12 9% 1 3070.40

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