Olsen Well Services Ltd. purchased equipment for $900,000 on September 30, 2013. The equipment was purchased with a $150,000 cash down payment and through the issue of a $750,000, five-year, 3.6% mortgage note payable for the balance. The terms provide for the mortgage to be repaid in monthly blended payments of $13,677 starting on October 31.
Instructions
(a) Record the issue of the note payable on September 30.
(b) Record the first two instalment payments on October 31 and November 30.
(c) Repeat part (b) assuming that the terms provided for monthly fixed principal payments of $12,500, rather than blended payments of $13,677.
Taking It Further
If the instalments are fixed principal payments of $12,500, will the interest expense over the life of the note be greater than, the same as, or less than if the instalments are a blended payment of $13,677? Explain.