On January 1, 2017, MM Co. borrows $350,000 cash from a bank and in return signs an 4% installment note for five annual payments of $78,619 each, with the first payment due one year after the note is signed

Required:

a. Prepare the journal entry to record issuance of the note.

b. For the first $96,590 annual payment at December 31, 2017, what amount goes toward interest expense? What amount goes toward principal reduction of the note?

a. Journal entry to record the issue of notes

Date Account Title & Explanation Debit $ Credit $

Jan 1 Cash 350,000

Notes Payable 350,000

(To record the issue of notes payable)

b. Calculation of Interest Expenses

Particulars Amount $

Beginning balance of loan payment 350,000

Annual interest rate 4%

Interest expenses 14,000

Hence the interest expenses = $14,000

Principal amount is calculated as the difference between the annual payment and the interest expenses as seen below

Particulars Amount $

Annual payment 96,590

Less: Interest expenses 14,000

Principal Payment 82,590

Hence, the principal payment = $82,590