A company takes out a five-year, $1-million mortgage on October 1. The interest rate on the loan is 6% per year, and blended payments of $19,333 (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 1,000,000 985,667 971,262 956,785 Payment 19,333 19,333 19,333 19,333 Interest 5,000 4,928 4,856 4,784 Principal 14,333 14,405 14,477 14,549 Balance 985,667 971,262 956,785 942,236