On January 1, 2021, Corvallis Carnivals borrows $30,000 to purchase a delivery truck by agreeing to a 5%, five-year loan with the bank. Payments of $566.14 are due at the end of each month, with the first installment due on January 31, 2021. Record the issuance of the note payable for cash and the first monthly payment.

Notes Payable is the credit agreement between two parties, in which one party borrows specific amount of money from the other party and promises to pay back the amount with interest on the specified date.

Company C borrows $30,000 on January 1, 2021 to purchase a truck. Interest rate is 6%. At the end of each month, payment due is $566.14. It is required to record the issue of note payable and first month interest payment.

Journal entry to record the issue of notes payable is given below

January 1, 2021:

Debit: Cash = $30,000

Credit: Notes payable = $30,000

Cash is debited because the amount is received by the company and what comes in is always debited. Notes payable is credited as it is a counter account.

Journal entry to record the monthly interest payment on January 31, 2021 is given below:

Debit: Interest expense ($30,000 x 5% x 1/12) = $125

Debit: Notes payable = 441.14

Credit: Cash = $566.14

Interest expense is debited because it is an expense for the company and any increase in expenses are always debited. Notes payable is debited as it represents the amount of amortization. Cash is credited because cash is paid by the company as what goes out is always credited.

Working note:

The Monthly interest expense has computed by multiplying the issue price ($30,000) with the interest rate (5%).

The balancing figure of Notes payable has computed as the difference between the interest expense and cash interest ($566.14 - $125) = $441.14 which represents the amount of amortization