Questions: Prepare entries to record mortgage note and installment payments. E15.10 (L0 3), AP Dreiling Company borrowed 300,000 on January 1, 2022, by issuing a 300,000, 8% mortgage note payable. The terms call for annual installment payments of 40,000 on December 31. Instructions 1. Prepare the journal entries to record the mortgage loan and the first two installment payments. 2. Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2022.

To address the question, we need to prepare journal entries for Dreiling Company to record the mortgage note and the first two installment payments, and determine the classification of the mortgage note payable as current and long-term liabilities at the end of 2022.

a. Recording the Mortgage Loan on January 1, 2022:

When Dreiling Company borrows $300,000 by issuing a mortgage note, the entry is:

• Debit: Cash $300,000
• Credit: Mortgage Note Payable $300,000

This entry reflects the receipt of cash from the loan and the obligation to repay it.

b. Recording the First Installment Payment on December 31, 2022:

The annual installment payment is $40,000. This payment includes both interest and principal repayment. The interest for the first year is calculated as follows:

• Interest = Principal x Interest Rate = $300,000 x 8% = $24,000

The principal repayment is the remainder of the installment payment:

• Principal Repayment = Installment Payment - Interest = $40,000 - $24,000 = $16,000

The journal entry for the first installment payment is:

• Debit: Interest Expense $24,000
• Debit: Mortgage Note Payable $16,000
• Credit: Cash $40,000

c. Recording the Second Installment Payment on December 31, 2023:

After the first payment, the remaining principal is $300,000 - $16,000 = $284,000. The interest for the second year is:

• Interest = $284,000 x 8% = $22,720

The principal repayment for the second installment is:

• Principal Repayment = $40,000 - $22,720 = $17,280

The journal entry for the second installment payment is:

• Debit: Interest Expense $22,720
• Debit: Mortgage Note Payable $17,280
• Credit: Cash $40,000

At the end of 2022, the mortgage note payable needs to be classified into current and long-term liabilities.

• Current Liability: The portion of the mortgage note payable due within the next year (the principal portion of the next installment payment). For the second installment, the principal repayment is $17,280.

• Long-term Liability: The remaining balance of the mortgage note payable after the current portion is deducted. After the first installment, the remaining principal is $284,000. Subtracting the current portion ($17,280) gives:

  • Long-term Liability = $284,000 - $17,280 = $266,720

1. The journal entries for the mortgage loan and the first two installment payments have been prepared.
2. As of December 31, 2022, the mortgage note payable is classified as $17,280 in current liabilities and $266,720 in long-term liabilities.