Question

On November 1, 2017, Norwood borrows \(200,000 cash from a bank by signing a five-year installment note bearing 8% interest. The note requires equal payments of \)50,091 each year on October 31.

Required

1. Complete an amortization table for this installment note similar to the one in Exhibit 10.12.
2. Prepare the journal entries in which Norwood records (a) accrued interest as of December 31, 2017 (the end of its annual reporting period) and (b) the first annual payment on the note.

Short answer

1. The Debit notes payable for all the years are $34,091, $36,818, $39,764, $42,945 and $46,382.
2. (a) Interest expense is debited by $2,667, and Interest payable is credited by $2,667.

(b) Interest expense, Note payable and Interest payable are debited by $13,333, $34,091 and $2,667; and Cash is credited by $50,091.

Step-by-step solution

Meaning of Instalment Notes

An installment note is an obligation requiring a series of payments to the lender.Installment notes are common for franchises and other businesses when lenders and borrowers agree to spread payments over several periods.

(1) Preparation of amortization table

Payments
	A	B	C	D	E
Period ending date	Beginning balance	Debit interest expense 8%of (A)	Debit notes payable (D)-(B)	Credit cash	Ending balance (A)-(C)
2017	2,00,000	16,000	34,091	50,091	165,909
2018	165,909	13,273	36,818	50,091	129,091
2019	129,091	10,327	39,764	50,091	89,327
2020	89,327	7,146	42,945	50,091	46,382
2021	46,382	3,710	46,382	50,091	0
		50,456	2,00,000	250,455

(2) Journal entries

Date	Particulars	Debit ($)	Credit ($)
Dec 31, 2017	Interest expense	2,667
	Interest payable		2,667
	(To record accrued interest)
Oct 31, 2018	Interest expense	13,333
	Notes payable	34,091
	Interest payable	2,667
	Cash		50,091
	(To record annual payment on note)

Working note:

1. Calculation of accrued interest

$\begin{array}{c}Accurued\mathrm{int}erest=\$16,000\times \frac{2}{12}\\ =\$2,667\end{array}$

1. Calculation of interest expense on first payment of instalment note

$\begin{array}{c}Interestexpense=\$16,000-\$2,667\\ =\$13,333\end{array}$