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On 1/1/X1, Downton Inc. financed the purchase of a building by issuing a $500, 000, 9%, 9-year,...

Question:

On 1/1/X1, Downton Inc. financed the purchase of a building by issuing a $500, 000, 9%, 9-year, mortgage note payable. The note will be paid back in equal annual installment payments of $ 83, 400 on December 31 of each year beginning December 31, 20X1 and ending on December 31, 20X9. Using the above information, prepare the journal entries to record the first and second installment payments on 12/31/X1 and 12/31/X2, respectively.

Mortgage Note Payable:

A mortgage note payable is a type of long-term debt requiring repayment of a specified amount in the form of installments over the term of the loan. When installments are made, each payment is made up of both principal and interest calculated based on an annual rate.

Answer and Explanation:

Using the above information, the journal entries to record the first and second installment payments on 12/31/X1 and 12/31/X2 are shown below:

Date Account/Description Debit Credit
12/31/X1 Mortgage Note Payable ($83,400-$45,000) $38,400
Interest Expense ($500,000*9%) $45,000
Cash $83,400
To record first interest and principal installment payment on mortgage note payable.
12/31/X2 Mortgage Note Payable ($83,400-$41,544) $41,856
Interest Expense (($500,000-$38,400)*9%) $41,544
Cash $83,400
To record second interest and principal installment payment on mortgage note payable.

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

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