19E_1 - Horngren'S Financial And Managerial Accounting

Question

Kellerman Company purchased a building and land with a fair market value of \(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of \)3,940.37. Round to two decimal places. Explanations are not required for journal entries. 

Requirements 

1. Journalize the mortgage payable issuance on January 1, 2018. 
2. Prepare an amortization schedule for the first two payments. 
3. Journalize the first payment on January 31, 2018. 
4. Journalize the second payment on February 28, 2018.

Step-by-Step Solution

Answer

1. Mortgage payable is $550,000
2. Interest expenses for the first and second months are $2,750 and $2,744.05.
3. Cash account is credited with $3,940.37

Mortgage account is debited with $1,196.32

Step 1: Meaning of Long-term notes payable

Long-term notes payable are the company's commitments to pay back notes after one year or one operational cycle, whichever comes first. In most cases, the long-term payable is recorded within the balance sheet's long-term liabilities column.

Step 2: (1) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Jan. 1, 2018	Building	425,000
	Land	125,000
	Mortgage payable		550,000

Step 3: (2) Preparing an amortization schedule

Date	Beginning Balance  (c-b)	Principal amount	Interest Expense (b)=(ax6%)	Total Payment (c)	Ending Balance (a)
01.01.2018					$550,000.00
01.31.2018	$550,000	$1,190.37	$2,750.00	$3,940.37	$548,809.63
02.28.2012	$548,809.63	$1,196.32	$2,744.05	$3,940.37	$547,613.31

Working notes:

Calculation of Interest expense for the first month

$\begin{array}{rcl}\mathrm{Interest} \mathrm{expense}& =& \mathrm{Mortgage} \mathrm{payable}\times \mathrm{Interest} \mathrm{rate}\times \mathrm{Time} \mathrm{period}\\ & =& \$550,000\times 6\%\times \frac{1}{12}\\ & =& \$2,750\\ & & \end{array}$

Calculation of Interest expense for the second month

$\begin{array}{rcl}\mathrm{Interest} \mathrm{expense}& =& \mathrm{Mortgage} \mathrm{payable}\times \mathrm{Interest} \mathrm{rate}\times \mathrm{Time} \mathrm{period}\\ & =& \$548,809.63\times 6\%\times \frac{1}{12}\\ & =& \$2.744.05\end{array}$

Step 4: (3) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Jan. 31, 2018	Mortgage	1,190.37
	Interest expense	2,750.00
	Cash		3,940.37

Step 5: (4) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Feb. 28, 2018	Mortgage	1,196.32
	Interest expense	2,744.05
	Cash		3,940.37