Exerecise 2

On January 1, 2019, NRE Developers LLC obtained a $1,000,000 construction loan to finance the building of a two-family residence in Brooklyn, NY. The loan has a 6% annual interest rate. The following closing costs were disbursed from the loans principal before any funds were transferred to NRE: origination fee of 0.75%, 2 points, a guarantee fee of 0.10% and other closing costs of $20,000 and a loan brokers commission of 0.50%. NRE prepares quarterly financial statements and estimates the construction project will be completed by 12/31/2019.

Required:

1. Show the journal entry or entries which NRE Developers would record upon receiving the proceeds of the loan on 1/1/2019.

2. Show any adjusting entry or entries which NRE Developers would record at the end of the first quarter of 2019 (3/31/2019) in relation with the loan and/or its costs.

3. Assume that at the end of the third quarter (9/30/2019), before recording the quarters adjusting entries, management at NRE changes the estimated completion of the construction project to March 31, 2020. Show any adjusting entry or entries which NRE Developers would record at the end of the third quarter of 2019 (9/30/2019) in relation with the loan and/or its costs, after changing the expected completion date for the project.

(Note that the exercise deals with a construction loan and its related closing costs. While the loan requires the borrower to pay interest, for purposes of this exercise, please ignore any interest related transactions.)