On January 1, 2016, Denver Company borrowed $25,000 by issuing a 5-year note to
ID: 2582962 • Letter: O
Question
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?
b.
c.
d.
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?
a. Debit Credit Interest Expense 6,595 Cash 6,595b.
Debit Credit Installment Note Payable 6,595 Cash 6,595c.
Debit Credit Interest Expense 2,500 Installment Note Payable 4,095 Cash 6,595d.
Debit Credit Interest Expense 2,500 Cash 4,095 Installment Note Payable 6,595Explanation / Answer
Solution:
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 x Rate of Interest 10%
= 25,000 x 10%
= $2,500
Installment Amount = $6,595
Loan Principal Repayment = 6,595 – 2,500 = $4,095
Interest Expense = $2,500
So the correct journal entry on Dec 31, 2016
Debit --- Notes Payable $4,095
Debit --- Interest Expense $2,500
Credit --- Cash $6,595
Hence, the correct entry is c.
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