Question

ABC purchased equipment at a cost of $ 45,000. To finance the purchase, he signed a five-year promissory note, which requires five equal annual payments. ABC will make the first payment in one year. Each payment will be in the amount of $ 12,795. Suppose the note carries an interest rate of 12% and ABC will pay $ 10,000 annually for the five years of the note. At the end of year 5, in addition to the $ 10,000, ABC will pay an additional amount. 1) What additional amount will ABC have to pay to pay off the promissory note? 2) How much will ABC owe after making the third annual payment? 3) What is the wage entry for the fifth payment, including the amount calculated in question (1)?

Answer 1

Answer 1:	Additional amount needs to pay	15,777
Answer 2:	Amount of balance owe after third annual payment	29,478

Answee 3 :

Journal entries
Date	General Journal	Debit	Credit
At the end of 5th year	Note Payable (7238+15777)	23,015
	Interest Expense	2,762
	Cash		25,777
	(To record Payment made toward note payable.)

Explanation :

Interest Expense = Beginning Notes Payable * 12%

Repaid Principal on Notes Payable = Payment made - Interest Expense

Ending Notes Payable = Beginning Notes Payable - Repaid Principal on Notes Payable

Amortization schedule
Year	Beginning Notes Payable	Payment made	Interest Expense	Repaid Principal on Notes Payable	Ending Notes Payable
1	45,000	10,000	5,400	4,600	40,400
2	40,400	10,000	4,848	5,152	35,248
3	35,248	10,000	4,230	5,770	29,478
4	29,478	10,000	3,537	6,463	23,015
5	23,015	10,000	2,762	7,238	15,777
Additional payment	15,777	15,777	Interest already calculated	15,777	0