Accounting for a Mortgage On January 1, 2012, Paik, Inc., borrowed $250,000 to ?

Question

Accounting for a Mortgage

On January 1, 2012, Paik, Inc., borrowed $250,000 to ?nance the purchase of machinery. The
terms of the mortgage require payments to be made at the end of every month with the ?rst pay-
ment being due on January 31, 2012. The length of the mortgage is ?ve years, and the mortgage
carries an interest rate of 12%.

1. Compute the amount of the monthly payment.

2. Prepare a mortgage amortization schedule for 2012.

3. Prepare the journal entry to be made on January 31, 2012, when the ?rst payment is
made.

4. For the remainder of the year, how will the journal entries relating to the mortgage di?er
from the one made on January 31?

Explanation / Answer

Formula is R= iA/(1-(1+i)^(-n)

Here r= .12/12= .01 and n= 12*5=60

R= .01 *250,000/[1-(1.01)^(-60)]

R=5561.11

DR Interest expense 2500

DR Mortgage Payable 3061.11

CR Cash 5561.11

Here is a link if you need a table

http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Each month interest will go down and the reduction to the mortgage will go up, since you are amortizing the balance.

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