On 1 May 2019, Bric-A-Brac purchased a building for $400 000, paying $100 000 as a deposit and giving the seller a 10% mortgage for the balance. The monthly repayment was $3000. The entry to record the payment on 1 June 2019 is:

Question

Quizplus · Accepted Answer

Since the mortgage is for the balance of the building price after the deposit, the mortgage payable at the time of purchase would be $300,000. The monthly repayment of $3000 consists of both principal repayment and interest expense. In the first month, only a portion of the repayment goes towards interest expense, while the rest goes towards repayment of the principal.

Using the straight-line method, we can calculate the interest expense portion of the repayment for the first month as follows:

Interest expense = 10% x $300,000 / 12 = $2500

Therefore, the entry to record the payment on 1 June 2019 would be:

DR Interest expense $2500 
DR Mortgage payable $500 
CR Bank $3000

On 1 May 2019, Bric-A-Brac Purchased a Building for $400