Question

On July 1, Shady Creek Resort borrowed $410,000 cash by signing a 10-year, 10% installment note requiring equal payments each June 30 of $66.726. What is the journal entry to record the first annual payment? Multiple Choice Ο C) Debit Cash $410,000, debit interest Expense $66,726: credit Notes Payable $476,726. Ο Debit interest Expense $66,726, credit Cash 566,726 Ο Debit interest Expense $41.000, credit Cash $41,000 Ο Debit interest Expense $41,000; debit interest Payable $25.726, credit Cash $66,726 Ο Debit Interest Expense $41,000, debit Notes Payable $25,726; credit Cash $66,726.

Answer 1

First 4 questions are being answered here:

1. Option (e) is correct

Interest expense = $410000 * 10% = $41000

Annual installment = $66726

Principal amount in annual installment = $66726 - $41000 = $25726

Required journal entry:

Debit Interest expense $41000

Debit Notes payable $25726

Credit Cash $66726

2. Option (b) is correct

Present value of the loan can be calculated by the following formula:

Present value of the loan = Present value of interest payment + Present value of loan payment at maturity

Annual interest = 10% * $40000 = $4000

Interest payments will be semi annual every year, so it is an annuity. While calculating the present value of interest payment, we will use the present value of annuity (PVA) of $1 table and loan payment at maturity is a one time payment, so we will use the present value (PV) of $1 table.

Now,

Present value = $4000 * PVA (10%, 5 years) + $40000 * PV (10%, 5 years)

Putting the given values in the above equation, we get,

Present value = ($4000 * 3.7908) + ($40000 * 0.6209)

Present value = $15163.2 + $24836

Present value = $40000

3. Option (d) is correct

Since the carrying amount of the bonds is more than the cash paid to retire the bonds, so there is a gain on retirement.

Gain or loss on retirement = Carrying value of the bonds - Cash paid

Gain or loss on retirement = $215000 - $211000

Gain or loss on retirement = $4000 (gain)

4. Option (d) is correct

Present value of the note is the present value of annual payment of $75800.

The payments will be same every year, so it is an annuity. While calculating the present value of note or annual payment payment, we will use the present value of annuity (PVA) of $1 table .

Now,

Present value = $75800 * PVA (6%, 5 years)

Putting the value of present value of annuity of $1 in the above equation, we get,

Present value = $75800 * 4.2124

Present value = $319299.92