Question

On January 1, 2021, Tropical Paradise borrows $34,000 by agreeing to a 6%, six-year note with the bank. The funds will be used to purchase a new BMW convertible for use in promoting resort properties to potential customers. Loan payments of $563.48 are due at the end of each month with the first installment due on January 31, 2021.
Required:
1. Record the issuance of the installment note payable and the first two monthly payments.

Answer 1

Answer:

The following entries are necessary:

Dr cash      $34,000

Cr notes payable      $34,000

Dr notes payable    $393.48

Dr interest expense   $170

Cr cash                                      $563.48

Dr notes payable    $395.45

Dr interest expense $168.03

Cr cash                                      $563.48

Explanation:

Upon issuance of the notes payable ,Tropical Paradise would receive cash of $34,000 which would be credited to notes payable as a liability and debited to cash account since it is a cash inflow.

However,the monthly repayment of $563.48 should be separated into principal repayment and interest payment as follows:

         Amortization schedule:

            Payments         Interest at 6%     Principal               Balance

                                                                                                $34,000

1            $563.48           $170                   $393.48                  $33606.52

2          $563.48             $168.03            $ 395.45                   $ 33,211.07  

The interest for first month=$34,000*6%*1/12=$170

The interest for second month =$33606.5*6%*1/12

Principal is payment minus interest

balance is previous balance minus principal