Question

pockets lent $20,000 to lego construction on january 1, 2024. lego signed a three-year, 5% installment note to be paid in three equal payments at the end of each year. required: prepare the journal entry on january 1, 2024, for pockets' lending the funds. calculate the amount of one installment payment. prepare an amortization schedule for the three-year term of the installment note. prepare pockets' journal entry for the first installment payment on december 31, 2024. prepare pockets' journal entry for the third installment payment on december 31, 2026.

Answer 1

To prepare the journal entry for Pockets lending the funds, debit Lego Construction and credit Cash. The amount of one installment payment is $6,666.67. The amortization schedule shows the breakdown of each installment payment. Prepare journal entries for the first and third installment payments.

Step-by-step explanation:

To prepare the journal entry on January 1, 2024, for Pockets' lending the funds, you would debit Lego Construction for $20,000 and credit Cash (or Loans Receivable) for $20,000. This reflects the transfer of funds from Pockets to Lego Construction.

To calculate the amount of one installment payment, you would divide the loan amount ($20,000) by the number of installments (3). This gives you an installment payment of $6,666.67.

The amortization schedule for the three-year term of the installment note would show the breakdown of each installment payment. Here is an example:

1. Year 1: Beginning Balance = $20,000, Interest Expense = $1,000 (5% of $20,000), Principal Payment = $5,666.67 ($6,666.67 - $1,000), Ending Balance = $14,333.33
2. Year 2: Beginning Balance = $14,333.33, Interest Expense = $716.67 (5% of $14,333.33), Principal Payment = $5,950 ($6,666.67 - $716.67), Ending Balance = $8,383.33
3. Year 3: Beginning Balance = $8,383.33, Interest Expense = $419.17 (5% of $8,383.33), Principal Payment = $6,247.50 ($6,666.67 - $419.17), Ending Balance = $1,135.83

To prepare Pockets' journal entry for the first installment payment on December 31, 2024, you would debit Lego Construction for $1,000 (the interest portion), debit Installment Notes Payable for $5,666.67 (the principal portion), and credit Cash for $6,666.67. This reflects the payment made by Lego Construction.

To prepare Pockets' journal entry for the third installment payment on December 31, 2026, you would debit Lego Construction for $419.17 (the interest portion), debit Installment Notes Payable for $6,247.50 (the principal portion), and credit Cash for $6,666.67. This reflects the final payment made by Lego Construction, fully paying off the loan.