Question

On January 1, 2012, Corvallis Carnivals borrows $20,000 to purchase a delivery truck by agreeing to a 7%, four-year loan with the bank. Payments of $478.92 are due at the end of each month, with the first installment due on January 31, 2012. Record the issuance of the note payable and the first monthly payment.

Answer 1

Explanation:

The journal entries are as follows

On January 1, 2012

Cash $20,000

     To Note payable $20,000

(Being the issuance of the note payable is recorded)

On January 31, 2012

Interest expense $116.67

Note payable $362.25

       To Cash $478.92

(Being the first monthly payment is recorded)

The interest expense is as follows

= Borrowed amount × monthly interest rate

= $20,000 × 0.5833%

= $116.67