Question

FinanceCo lent $8.8 million to Corbin Construction on January 1, 2021, to construct a playground. Corbin signed a three-year, 5% installment note to be paid in three equal payments at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:

1. Prepare the journal entry for FinanceCo’s lending the funds on January 1, 2021.

2. Prepare an amortization schedule for the three-year term of the installment note.

3. Prepare the journal entry for the first installment payment on December 31, 2021.

4. Prepare the journal entry for the third installment payment on December 31, 2023.

Answer 1

1)

Date	Account title	Debit	credit
1 Jan 2021	Note receivable	8,800,000
	cash		8,800,000

2)Annual installment = Amount provided /PVA5%,3

                              = 8800000 /2.72325

                              = 3231433 Rounded

Date	Installment payment	Interest expense	principal repayment	carrying value of note
1 Jan 2021				8800000
31 Dec 2021	3231433	8800000*5%= 440000	3231433-440000= 2791433	8800000-2791433= 6008567
31 Dec 2022	3231433	6008567*5%= 300428	3231433-300428= 2931005	6008567-2931005= 3077562
31 Dec 2023	3231433	3077562*5%= 153871 *	3077562	0

*Adjust for rounding of decimal places such the carrying value of note at end of year 3 is 0

3 and 4)In books of FinanceCo

Date	Account title	Debit	credit
December 31 2021	Cash	3231433
	Note receivable		2791433
	interest revenue		440000
December 31 2023	Cash	3231433
	Note receivable		3077562
	interest revenue		153871