Question

On January 1, 2018, Corvallis Carnivals borrows $28,000 to purchase a delivery truck by agreeing to a 6%, three-year loan with the bank. Payments of $851.81 are due at the end of each month, with the first installment due on January 31, 2018. Record the issuance of the note payable and the first monthly payment

Answer 1

Answer:

Cash     28,000 debit

   Note payable    28,000 credit

--to record signing of note payable--

Interest expense   140    debit

Note payable         711.41 debit

        Cash                           851.81 credit

--to record first installment--

Explanation:

When the note is issued we record the entry of cash and the liaiblity created when signing the promissory note with the bank. The truck is purchased in another transaciton with the supplier.

Each payment will have an interest component and the principal amortization

first payment:

principal x rate x time = interest

we have to make sure to express rate and time in the same metric.

so 1 month = 1/12 of a year

28,000 x  0.06 x 1/12 = 140 interest expense

then the diffrence will be amortzation:

851.81 - 140 = 711.41 amortization