Amortizing a Mortgage and the Effect on the Financial Statements
On January 1, 2008, Picard Inc. purchased a new piece of equipment from La Forge Engineering to expand its production facilities. The equipment was purchased at a cost of $800,000. Picard financed the purchase with an $800,000 mortgage to be repaid in annual payments over five years at a rate of 10%. The mortgage was arranged through Pulaski Bank. The annual payments of $211,038 are to be made on December 31 of each year.
Instructions:
1. Prepare a mortgage amortization schedule for the 5 year life of the mortgage.
2. Assuming the equipment is expected to last for five years (with zero salvage value), determine the net amount at which the equipment will be reported on the balance sheet at the end of each year for its 5 year life using straight line depreciation.
3. Compare the liability amount to be disclosed on the balance sheet at the end of each year for the 5 year mortgage term with the asset amount to be disclosed at the end of the same years. Identify the primary reasons for the differences each year.