On December 31, 2012 ABC Corporation purchased a building costing $300,000 by issuing a 10% 5-year, mortgage note payable on December 31, 2012. Five ANNUAL payments will be made each year to pay bac

On December 31, 2012 ABC Corporation purchased a building costing $300,000 by

issuing a 10% 5-year, mortgage note payable on December 31, 2012. Five ANNUAL

payments will be made each year to pay back the mortgage beginning on December 31,

2013.

A. What annual payment is requried at a 10% rate? Hint: Remember, in computing the

price of a bond, we had to take the present value of the future cash payments (the face

value and the stated interest) to determine the price. The stated interest represented

an annuity, so to take the present value of the stated interest, we did the following:

Annuity Payment x PVA Factor from table = PV of the annuity

Here the mortgage “price” (that is the PV of the annuity) is already known—it’s the

$300,000 we’re trying to borrow. Given that we know the interest rate to use and the

number of time periods to use to look up the PVA factor in the table, can you

determine the required annuity (that is the mortgage) payment?

B. Give the journal entry to record the purchase of the building and the issue of the

mortgage note payable on December 31, 2012.

C. Prepare an effective interest amortization table for five years.

D. Give the general journal entries necessary to record each of the five mortgage

payments beginning on December 31, 2013.

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