   Chapter 14, Problem 14.12EX

Chapter
Section
Textbook Problem

Entries for installment note transactionsOn January 1, Year 1, Bryson Company obtained a $147,750, four-year, 7% installment note from Campbell Bank. The note requires annual payments of$43,620, beginning on December 31, Year 1.a. Prepare an amortization table for this installment note, similar to the one presented in Exhibit 4.b. Journalize the entries for the issuance of the note and the four annual note payments.c. Describe how the annual note payment would be reported in the Year 1 income statement.

(a)

To determine

Long-term notes payable: Long-term notes payable represent a legal and written promise made by the business to pay a debt with interest over a period of more than a year. It is reported under the long-term liability section of the balance sheet.

Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.

Amortization Schedule: An amortization schedule is a table that shows the details of each loan payment allocated between the principal amount and the overdue interest along with the beginning and ending balance of the loan. From the amortization schedule of the loan, the periodical interest expense, total interest expense and total payment made are known.

To prepare: An amortization table for the installment note.

Explanation

Prepare an amortization table for the installment note.

 Amortization schedule of Installment Notes A B C D E Year Ending December 31 January 1 Carrying Amount Note Payment (Cash Paid) Interest Expense (7% of January 1 Note Carrying Amount) Decrease in Notes Payable (B – C) December 31 Carrying Amount (A – D) Year 1 $147,750$43,620 $10,343 (1)$33,277 $114,473 Year 2$114,473 $43,620$8,013 (2) $35,607$78,866 Year 3 $78,866$43,620 $5,521 (3)$38,099 $40,767 Year 4$40,767 $43,620$2,853 (4) $40,767 - Total$174,480 $26,730$147,750

Table (1)

Working notes:

Calculate interest expense for Year 1.

Interest expense=7%×January1NoteCarrying amount =7%×$147,750=$10,343 (1)

Calculate interest expense for Year 2

(b)

To determine

To Journalize: The issuance of the installment note for cash.

(c)

To determine

To describe: How the annual note payment would be reported in the Year 1 income statement.

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