Question

On January 1, 2021, Tropical Paradise borrows $35,000 by agreeing to a 6%, five-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 $676.65 are due at the end of each month with the first installment due on January 31, 2021.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

(A) Cash A/c Dr $35,000

                 To  Note Payable $35,000

(Being issuance of the note payable is recorded)\

(B) Interest Expense A/c Dr $175

    Note Payable A/c Dr $501.65

                           To Cash A/c $676.65

(Being payment of first monthly installment is recorded)

The interest expense is computed below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)  

= $35,000 × 6% × (1 months ÷ 12 months)

= $175

The 1 months is calculated from January 1 to January 31

(C) Interest Expense A/c Dr $172.49

    Note Payable A/c Dr $504.16

                           To Cash A/c $676.65

(Being payment of second monthly installment is recorded)

The interest expense is computed below:

= Principal - first installment × rate of interest × number of months ÷ (total number of months in a year)  

= $35,000 - $501.65 × 6% × (1 months ÷ 12 months)

= $172.49

The 1 months is calculated from January 1 to January 31

And, the remaining amount is debited to note payable