Applying Time Value of Money Concepts
Fulton Corporation purchases new manufacturing facilities and assumes a 10-year mortgage of $4,000,000. The annual interest rate on the mortgage is 5.5% and payments are due at the end of each year.


a. Determine the mortgage payment that Fulton Corporation must make each year.

Note: Round answer to the nearest dollar, if applicable.
Note: Do not use a negative sign.
$Answer 1
530,671



b. Use Excel to prepare a mortgage amortization schedule for the 10 years.
Instructions:
1. Do not round your computations in Excel.
2. Enter answers rounded to the nearest dollar.
3. Do not use negative signs with your answers.
Year	Mortgage Payment	Interest Portion	Principal Portion	Carrying Amount
Start of loan				Answer 2
4,000,000

Year 1	Answer 3
530,671

Answer 4
220,000

Answer 5
310,671

Answer 6
3,689,329

Year 2	Answer 7
530,671

Answer 8
0

Answer 9
0

Answer 10
0

Year 3	Answer 11
530,671

Answer 12
0

Answer 13
0

Answer 14
0

Year 4	Answer 15
530,671

Answer 16
0

Answer 17
0

Answer 18
0

Year 5	Answer 19
530,671

Answer 20
0

Answer 21
0

Answer 22
0

Year 6	Answer 23
530,671

Answer 24
0

Answer 25
0

Answer 26
0

Year 7	Answer 27
530,671

Answer 28
0

Answer 29
0

Answer 30
0

Year 8	Answer 31
530,671

Answer 32
0

Answer 33
0

Answer 34
0

Year 9	Answer 35
530,671

Answer 36
0

Answer 37
0

Answer 38
0

Year 10	Answer 39
530,671

Answer 40
0

Answer 41
0

Answer 42
0


c. At the end of the first year, what amount will Fulton include as “current maturities of long-term debt” on its balance sheet?

Note: Enter answer rounded to the nearest dollar, if applicable.
Answer 43
0



### Part a. Mortgage Payment Calculation:

To determine the annual mortgage payment for Fulton Corporation, we will use the formula for an **ordinary annuity**, which is given as:

\[
PMT = \frac{P \times r \times (1 + r)^n}{(1 + r)^n - 1}
\]

Where:
- $ PMT $ is the annual mortgage payment,
- $ P $ is the principal ($4,000,000),
- $ r $ is the interest rate per period (5.5% or 0.055),
- $ n $ is the number of periods (10 years).

Substitute the values into the formula:

\[
PMT = \frac{4,000,000 \times 0.055 \times (1 + 0.055)^{10}}{(1 + 0.055)^{10} - 1}
\]

The calculated payment should match the provided answer of $530,671, which is rounded to the nearest dollar.

### Part b. Mortgage Amortization Schedule:

To prepare the amortization schedule, we must calculate the interest portion and the principal portion for each year.

#### For Year 1:
1. **Interest Portion**: The interest for the first year is based on the principal at the start of the year (i.e., $4,000,000).

\[
\text{Interest (Year 1)} = 4,000,000 \times 0.055 = 220,000
\]

2. **Principal Portion**: The principal portion of the payment is the total payment minus the interest.

\[
\text{Principal (Year 1)} = 530,671 - 220,000 = 310,671
\]

3. **Carrying Amount**: After the first year's payment, the carrying amount (remaining loan balance) is the original principal minus the principal portion paid.

\[
\text{Carrying Amount (End of Year 1)} = 4,000,000 - 310,671 = 3,689,329
\]

This process is repeated for each subsequent year. The interest for each year is based on the remaining carrying amount, and the principal portion is computed similarly.

For Year 2:
1. **Interest Portion**: 

\[
\text{Interest (Year 2)} = 3,689,329 \times 0.055 = 202,913
\]

2. **Principal Portion**: 

\[
\text{Principal (Year 2)} = 530,671 - 202,913 = 327,758
\]

3. **Carrying Amount**: 

\[
\text{Carrying Amount (End of Year 2)} = 3,689,329 - 327,758 = 3,361,571
\]

This continues until the loan is fully paid off in year 10.

#### Part c. Current Maturities of Long-Term Debt:
The "current maturities of long-term debt" is the principal portion of the mortgage payment due within the next year. At the end of the first year, Fulton will include the second year's principal portion in the balance sheet as current maturities.

\[
\text{Current Maturities (End of Year 1)} = 327,758
\]

### Summary:

- **Mortgage Payment (Part a)**: $530,671
- **Amortization Schedule (Part b)**: Can be created by following the steps outlined for each year.
- **Current Maturities of Long-Term Debt (Part c)**: $327,758.

---

Would you like further clarification on any part of this? Here are 5 related questions you can explore:

1. How does a change in the interest rate affect the mortgage payment?
2. What is the effect of making additional payments towards the principal on the amortization schedule?
3. How is the time value of money applied in this mortgage calculation?
4. Can we apply the same formula to calculate monthly payments instead of annual ones?
5. What financial accounting entries are made for the principal and interest portions?

**Tip**: Always ensure that you check how rounding is handled when calculating mortgage payments and preparing amortization schedules to avoid discrepancies.

Applying Time Value of Money Concepts: Fulton Corporation purchases new manufacturing facilities and assumes a 10-year mortgage of $4,000,000. The annual interest rate on the mortgage is 5.5% and payments are due at the end of each year. a. Determine the mortgage payment that Fulton Corporation must make each year. b. Use Excel to prepare a mortgage amortization schedule for the 10 years. c. At the end of the first year, what amount will Fulton include as 'current maturities of long-term debt' on its balance sheet?

Discover how to calculate annual mortgage payments for a $4,000,000 loan over 10 years at an interest rate of 5.5%. Learn to create a mortgage amortization schedule in Excel and determine the current maturities of long-term debt after the first year. Suitable for finance and accounting students.

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