Question

On January 1, 2016, Denver Company borrowed $25,000 by issuing a 5-year note to Capital Bank. The note had a 10% annual rate of interest. The loan agreement called for five equal payments of $6,595 on December 31 of each year 2016 through 2020. What is the correct journal entry to record the loan payment on December 31, 2016?

Answer 1

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