On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. Calculate the balance of the Mortgage Payable account after the payment of the first installment.

Question

Quizplus · Accepted Answer

The first installment payment of $21,139 is made on January 1, 2016. This payment is comprised of both interest expense and principal reduction.

To calculate the interest expense, we first need to determine the carrying value of the mortgage payable account as of January 1, 2016.

Carrying value as of January 1, 2016 = $80,000 (original loan amount) - $21,139 (first installment payment) = $58,861

We can then calculate the interest expense for the year by multiplying the carrying value by the interest rate:

Interest expense = $58,861 × 0.15 = $8,829.15

The remaining portion of the installment payment goes towards reducing the principal balance of the mortgage payable. We can calculate this amount as follows:

Principal reduction = $21,139 - $8,829.15 = $12,309.85

To determine the balance of the mortgage payable account after the payment of the first installment, we subtract the amount of principal reduction from the carrying value:

Balance of mortgage payable after first installment = $58,861 - $12,309.85 = $46,551.15

Therefore, the correct answer is C) $70,861.

On January 1, 2015, Bratios Company Purchases Equipment and Signs