The annual interest rate on the mortgage payable was 8.50%. Interest expense for

Question

The annual interest rate on the mortgage payable was 8.50%. Interest expense for one-half month should be computed because the building and land were purchased and the liability incurred on June 16. Q:What would debit/credit be?

transaction it's referencing: Byte purchased a building and the land it is on for $125,000, to house its repair facilities and to store computer equipment. The lot on which the building is located is valued at $20,000. The balance of the cost is to be allocated to the building. Byte made a cash down payment of $12,500 and executed a mortgage for the balance. The mortgage is payable in eight equal annual installments beginning July 1.

Explanation / Answer

On June 16, that is at the time of purchase, Land and Building should be debited by $20,000 and $105,000 respectively and Cash and Mortgage Payable or Note Payable should be credited by $12,500 and $112,500 respectively.

Following journal entry will be recorded on June 16:

On July 1, interest expense will be calculated as follows:

Preincipal amount outstanding = $112,500

Annual interest rate = 8.50%

Interest expense to be recorded on July 1 = $112,500 x 8.5% x (1.5/12) = $1,195.31

Date Account Titles and Explanation Debit Credit June 16 Land 20,000 Building 105,000       Cash 12,500       Notes/Mortgage Payable 112,500

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