December 1, 2014, Garden Corporation incurs a 30-year, $400,000 mortgage liabili

Question

December 1, 2014, Garden Corporation incurs a 30-year, $400,000 mortgage liability upon purchase of a warehouse. This mortgage is payable in monthly installments of $4,116, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2014.

1. How much of the first payment made on December 31, 2014, is allocated to repayment of principal? $________

2       What is the total liability related to this mortgage to be reported in Garden’s balance sheet at December 31, 2014? (Do not separate into current and longterm portions.)

                                                                                                                                    $________

3       The portion of the second monthly payment made on January 31, 2015, which represents interest expense is   $________

Explanation / Answer

Answer:

(1) Interest under first payment made on Dec 31, 2014 = Outstanding Principal * Yearly interest rate * 1/12

= $ 400,000 * 12% *1/12 = $ 4,000

Total payment under first installment = Interest + Principal

$ 4,116 = $ 4,000 + Principal

Principal = $ 4,116 - $ 4,000 = $ 116

(2) Total liability related to this mortgage to be reported in Garden’s balance sheet at December 31, 2014 = Total outstanding principal at Dec 31 2014 = Total Mortgage Loan - Principal paid till Dec 31 2014

= $ 400,000 - $ 116 = $399,884

(3) Interest under second monthly payment made on Jan 31, 2015 = Outstanding Principal * Yearly interest rate * 1/12

= $399,884 * 12 % * 1/12 = $3,998.84

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