Preparation and Use of an Amortization Table
On October 1, 2011, Walla signed a 4-year, $100,000 note payable to Vicksburg National Bankin conjunction with the purchase of equipment. The note calls for interest at an annual rate12 percent (1 percent permonth). The note is fully amortizing over a period of48 months.The bank sent Walla anamortization table showing theallocation of monthly payments betweeninterest and principal over the life of the loan.Asmall part of this amortization table is illustratedbelow. (For convenience, amounts have been rounded to the nearest dollar.)
AMORTIZATION TABLE (12%,4-YEAR MORTGAGE 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. 1,2011 | - | - | - | $100,000 |
1 | Nov. 1 | $2,633 | $1000 | $1,633 | 98,367 |
2 | Nov. 1 | $2,633 | 984 | 1,649 | 96,718 |
Instructions
a. Explain whether the amounts ofinterest expense and the reductions intheunpaid principal are likely tochange in any predictable pattern from month to month.
b. Prepare journal entries to record the first two monthly payments on this note.
c. Complete this amortization table for two more monthly installments.
d. Will any amounts relating to this 4-year note be classified as current liabilities in Walla’s December 31 , 2011 , balance.sheet? Explain, but you need not compute any additional dollaramounts.
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