Question

FinanceCo lent $10.0 million to Corbin Construction on January 1, 2021, to construct a playground. Corbin signed a three-year, 6% 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) (Use appropriate factor(s) from the tables provided.)

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

		Loan Amount	$10,000,000
		Rate of Interest	6%
		Term of loan	3 Years
		Present value annuity factor(6%, 3 years)=	2.67301
		Annuity amount =	$3,741,101	(10,000,000/2.67301)
1	Date	Account titles and explanation	Debit	Credit
	01-Jan-21	Loan (Corbin construction)	$10,000,000
		cash		$10,000,000
		(loan given recorded)
2	Period	Opening value	Cash inflow	interest	Reduction in principle	Ending value
	1	$10,000,000	$3,741,101	$600,000	$3,141,101	$6,858,899
	2	$6,858,899	$3,741,101	$411,534	$3,329,567	$3,529,332
	3	$3,529,332	$3,741,101	$211,769	$3,529,332	$0
				(rounded off)
3	Date	Account titles and explanation	Debit	Credit
	31-Dec-21	Cash	$3,741,101
		Interest income		$600,000
		Loan(corbin construction)		$3,141,101
		(first installment recorded)
4	31-Dec-23	Cash	$3,741,101
		Interest income		$211,769
		Loan(corbin construction)		$3,529,332
		(third installment recorded)