A company takes out a four-year, $800,000 mortgage on May 1. The interest rate on the loan is 5% per year, and blended payments of $18,423 (including both interest and principal) are to be made at the end of each month. The following is an extract from the loan amortization table the bank provided the company:

Required:
a. The monthly payments will be the same amount each month, throughout the entire term of the loan. From the loan amortization table, we can see that the portion of the payment related to interest is decreasing each payment. Prepare a brief explanation for why this is happening.
b. Prepare the journal entries to record the inception of the loan and the first two monthly payments.

Transcribed Image Text:

Beginning Loan Ending Loan Payment 1 Payment 2 Payment 3 Payment 4 Balance 800,000 784,910 769,757 754,541 Pavment 18,423 18,423 18,423 18,423 Interest 3,333 3,270 3,207 3,144 Principal 15,090 15,153 15,216 15,279 Balance 784,910 769,757 754,541 739,262