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

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

Step-by-step 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