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20 February, 07:54

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?

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  1. 20 February, 08:22
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    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
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