Question

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?

Answer 1

Answer:

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