Answer:
On 01 January 2021: Debit Cash for $50,000; and Credit Note payable for $50,000.
On 31 Jan 2021: Debit Interest expense for $250; Debit Note payable for $578.64; and Credit Cash for $828.64.
On 28 Feb 2021: Debit Interest expense for $247.11; Debit Note payable for $581.53; Credit Cash for $828.64.
Explanation:
Note: This question is not complete. The complete question is therefore provided before answering the question as follows:
On January 1, 2021, Tropical Paradise borrows $50,000 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 $828.64 are due at the end of each month with the first installment due on January 31, 2021.
Record the issuance of the installment note payable and the first two monthly payments.
The explanation to the answer is now given as follows:
Date Account Title Dr ($) CR ($)
01 Jan 2021 Cash 50,000
Note payable 50,000
(To record $50,000 borrowing through 6% Note from the bank.)
31 Jan 2021 Interest expense (w.1) 250
Note payable (w.2) 578.64
Cash 828.64
(To record first month interest expense paid and part payment of $50,000 note.)
28 Feb 2021 Interest expense (w.4) 247.11
Note payable (w.5) 581.53
Cash 828.64
(To record second month interest expense paid and part payment of $50,000 note.)
Workings:
w.1: Interest expense = First month interest expense = (Interest rate / 12) * Loan amount = (6% / 12) *$50,000 = $250
w.2: Note payable = First month part payment of note payable principal = Monthly payment - First month interest expense = $828.64 - $250 = $578.64
w.3: Loan balance after first month = Loan amount - First month part payment of note payable principal = $50,000 - $578.64 = $49,421.36
w.4: Interest expense = Second month interest expense = (Interest rate / 12) * Loan balance after first month = (6% / 12) *$49,421.36 = $247.11
w.5: Note payable = Second month part payment of note payable principal = Monthly payment - Second month interest expense = $828.64 - $247.11 = $581.53