Question

Problem 10-5A Installment notes LO C1

On November 1, 2019, Norwood borrows $540,000 cash from a bank by signing a five-year installment note bearing 7% interest. The note requires equal payments of $131,701 each year on October 31.

Required:
1. Complete an amortization table for this installment note.
2. Prepare the journal entries in which Norwood records the following:
(a) Accrued interest as of December 31, 2019 (the end of its annual reporting period).
(b) The first annual payment on the note.

Answer 1

Solution 1:

Amortization table - Installment Note
Date	Cash received	Interest revenue	Reduction in carrying value	Carrying amount of note
1-Nov-19				$540,000
31-Oct-20	$131,701	$37,800	$93,901	$446,099
31-Oct-21	$131,701	$31,227	$100,474	$345,625
31-Oct-22	$131,701	$24,194	$107,507	$238,118
31-Oct-23	$131,701	$16,668	$115,033	$123,085
31-Oct-24	$131,701	$8,616	$123,085	$0

Solution 2:

Journal Entries - Norwood
Date	Particulars	Debit	Credit
31-Dec-19	Interest expense Dr ($540,000*7%*2/12)	$6,300.00
	To Interest Payable		$6,300.00
	(Being interest accrued on note)
31-Oct-20	Notes Payable Dr	$93,901.00
	Interest payable Dr	$6,300.00
	Interest expense Dr ($540,000*7%*10/12)	$31,500.00
	To Cash		$131,701.00
	(To record installment payment)