Question

1010-4 PROBLEM 10.4B preparation and Use of an Amortization Table pays 16 percent interest instead of the 10 percent rate changeu On October 1, 2018, Jenco signed a four-year. $100.000 note payable to Vicksburg State Bank in conjunction with the purchase of equipment. The note calls for interest at an annual rate of 12 per- cent (1 percent per month). The note is fully amortizing over a period of 48 months. The bank sent Jenco an amortization table showine the allocation of monthly payments between interest and principal over the life of the loan. A small part of this amortization table is illustrated as follows. (For convenience, amounts have been rounded to the nearest dollar.) AMORTIZATION TABLE (12%, 4-YEAR NOTE PAYABLE FOR $100,000; PAYABLE IN 48 MONTHLY INSTALLMENTS OF $2,633) Interest Period Payment Date Monthly Payment interest Expense Principal Reduction Unpaid Balance Issue date Oct 1, 2018 Nov. 1 Dec. 1 $2,633 2.633 $1,000 984 $1,633 1,649 $100,000 98,367 96,718 Instructions a. Explain whether the amounts of interest expense and the reductions in the unpaid principal are likely to change in any predictable pattern from month to month. b. Prepare journal entries to record the first two monthly payments on this note.

Answer 1

a.	Interest expense and unpaid balance will decrease throughout the amortization period
b.	Date	Account titles and explanation					Debit	Credit
	Nov 1.	Interest expense					1000
		Note payable					1633
		Cash						2633
		(Monthly installment paid)
	Dec 1.	Interest expense					984
		Note payable					1649
		Cash						2633
		(Monthly installment paid)
c.	Interest period	Payment date	Monthly payment	Interest expense	Principal reduction	Unpaid balance
	Issue date	Oct 1.				100000
	1	Nov 1.	2633	1000	1633	98367
	2	Dec 1.	2633	984	1649	96718
	3	Jan 1.	2633	967	1666	95052
				(96718*1%)	(2633-967)	(96718-1666)
	4	Feb 1.	2633	951	1682	93369
				(95052*1%)	(2633-951)	(95052-1682)
d.	Current liability:
	Interest expense for the 3rd interest period ( To be paid in Jan 1)-Interest payable
	Principal reduction for the 3rd interest period ( To be paid in Jan 1)-Note payable
	Principal reduction for the next 12 monthly installments after 3rd interest period-Note payable