On January 1, 2017, MM Co. borrows $350,000 cash from a bank and in return signs an 4% installment note for five annual payments of $78,619 each, with the first payment due one year after the note is signed

Required:

a. Prepare the journal entry to record issuance of the note.

b. For the first $96,590 annual payment at December 31, 2017, what amount goes toward interest expense? What amount goes toward principal reduction of the note?

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9 September, 16:06

On January 1, 2017, MM Co. borrows $350,000 cash from a bank and in return signs an 4% installment note for five annual payments of $78,619 each, with the first payment due one year after the note is signed

Required:

a. Prepare the journal entry to record issuance of the note.

b. For the first $96,590 annual payment at December 31, 2017, what amount goes toward interest expense? What amount goes toward principal reduction of the note?

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Answers (1)

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Erika · Answer 1

a. Journal entry to record the issue of notes

Date Account Title & Explanation Debit $ Credit $

Jan 1 Cash 350,000

Notes Payable 350,000

(To record the issue of notes payable)

b. Calculation of Interest Expenses

Particulars Amount $

Beginning balance of loan payment 350,000

Annual interest rate 4%

Interest expenses 14,000

Hence the interest expenses = $14,000

Principal amount is calculated as the difference between the annual payment and the interest expenses as seen below

Particulars Amount $

Annual payment 96,590

Less: Interest expenses 14,000

Principal Payment 82,590

Hence, the principal payment = $82,590