Kaman Company purchased a building and land with a fair market value of $450,000 (building, $350,000 and land, $100,000) on January 1, 2024. Kaman signed a 20-year, 7% mortgage payable. Kaman will make monthly payments of $3,488.85. Round to two decimal places. Explanations are not required for journal entries.

Journals :

Land $350,000 (debit)

Building $100,000 (debit)

Mortgage Payable $450,000 (credit)

Explanation:

The Land and Building is Initially measured at cost of acquisition not the fair market value. The cost of Acquisition in this case is the Present Value of the Mortgage Payable used to obtain the Property.

Step 1

Use the Time Value of Money Techniques to find the  Present Value of the Mortgage.

Calculation of Present Value of the Mortgage

N = 20 × 12 = 240

P/YR = 12

PMT = - $3,488.85

I = 7 %

FV = $ 0

PV = ?

Using a Financial Calculator to Input the Values as above, the  Present Value of the Mortgage will be $450,000.

Step 2

When Recording, apportion the Land and Building costs using their fair market value.

Land $350,000 (debit)

Building $100,000 (debit)

Mortgage Payable $450,000 (credit)

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