Question

On January 1, MM Co. borrows $340,000 cash from a bank and in return signs an 8% installment note for five annual payments of $85,155 each. 1. Prepare the journal entry to record issuance of the note. 2. For the first $85,155 annual payment at December 31, what amount goes toward interest expense

Answer 1

Answer:

Required 1

January 1

Cash $340,000 (debit)

Note Payable $340,000 (credit)

Required 2

$27,200  goes toward interest expense.

Explanation:

Issuance of the Note :

Assets of Cash are increasing, the Liabilities are also increasing.

Payment at December 31 :

The Annual Payment comprises of Capital Repayment and Interest Expense.

Prepare an amortization schedule using the details of the Note highlighted below to separate the Capital Repayment and  Interest Expense Component :

PV = $340,000

PMT = - $85,155

N = 5

i = 8%

P/yr = 1

FV = $0

Note Schedule is attached !

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