Answer:
The correct journal entry on Dec 31, 2016 is as follows:
Notes Payable A/c Dr. $4,095
Interest Expense A/c Dr. $2,500
To Cash $6,595
(To record the loan payment on December 31, 2016)
Workings:
Notes Payable Amount = $25,000
Equal Annual Installment to be paid = $6,595
Installment amount includes the interest for the outstanding amount of loan over the life.
Interest on Loan:
= Carrying Value of Loan at the beginning of the year 1 × Rate of Interest 10%
= 25,000 × 10%
= $2,500
Installment Amount = $6,595
Loan Principal Repayment:
= Installment Amount - Interest on Loan
= 6,595 - 2,500
= $4,095
Interest Expense = $2,500
