Question

XYZ company bought equipment for $20,000 by signing a 4-year note with ABC savings bank. XYZ’s borrowing rate was 4% and the monthly payments are $469.70. The lending officer at the bank prepared the following amortization schedule:

Payment # Payment Interest principal balance

1 469.70 100 369.70 19,630.30

2 469.70 98.15 371.55 19,258.75

3 469.70 96.29 373.41 18,885.34

____________________________

46 469.70 6.98 462.72 932.40

47 469.70 4.66 465.04 467.36

48 469.70 2.34 467.36 0.00

Required:

1. Show the journal entry that XYZ Company would make on the day the company borrowed the $20,000

2. Record the Journal Entry that ABC savings would make on the day they made the loan to XYZ

3. What entry will XYZ company record when they make their first payment to ABC savings bank?

4. What entry will ABC savings bank record when they receive the last payment from XYZ company?

Answer 1

Journal Entries are the entries to record the daily transaction in the books so as to keep a record of the daily transactions and later on club them in the ledgers etc. (the books of accounts) for the company's monthly/ yearly compilation.

Journal entries are passed based on the three types of accounts that is, the accounts are classified into either of the three categories and then the rules for passing the journal entry are followed. The three types of accounts are:

a. Personal Accounts - Names of persons/ individuals or companies fall into this category and the rule is:

Debit the receiver and credit the giver

b. Real Accounts - All tangible accounts (like: cash) fall into this category and the rule is:

Debit what comes in and credit what goes out

c. Nominal Accounts : All incomes and expenses fall into this category and the rule is:

Debit all expenses and losses and credit all incomes and gains

Journal Entries will have an effect on two accounts at a time as its a double-entry bookkeeping system.

1. Journal Entry in the XYZ Company's Books for taking the loan would be:

Date	Particulars	Debit Amount	Credit Amount
	Equipment A/c dr.	$ 20,000
	To ABC Bank A/c - Notes Payable		$ 20,000
	(Being Equipment purchased by issuing a 4-year Note from ABC Savings Bank)

As seen above, Company purchased an Equipment worth $ 20,000 so, in the company's books of accounts, Equipment (asset increase) is debited and Notes Payable (Liability increase) is credited as above.

2. Journal Entry in the ABC Savings Bank's Books for giving the loan would be:

Date	Particulars	Debit Amount	Credit Amount
	Notes Receivable - 1st Installment dr.	$ 20,000
	To XYZ Company		$ 20,000
	(Being loan is given to XYZ Company by issuing a 4-year Notes Receivable)

As seen above, in the Books of accounts of the Bank, Notes issued will be receivable from the customer so asset for the Bank and so, it is debited in the Books of accounts for the Bank and it is issued against the company's name so, company's name is credited as above.

3. Journal entry to record the payment of the first installment against the Notes Payable issued will be:

Date	Particulars	Debit Amount	Credit Amount
	Notes Payable A/c Dr.	$ 396.70
	Interest on Notes Payable A/c Dr.	$ 100
	To ABC Savings Bank		$ 496.70
	(Being the first installment of Notes payable paid to Bank)

As seen above, Notes Payable is a liability account and since the first installment is being paid so, liability is reducing and hence the account is debited as above. Also, Interest on Notes Payable (as given in the question) is an expense for the company and so, it is debited as above.

4. The journal entry in the Bank's Books for receiving the last installment would be:

Date	Particulars	Debit Amount	Credit Amount
	Notes Receivable - 48th Installment A/c dr.	$ 467.36
	Interest on Notes Receivable A/c dr.	$ 2.34
	To XYZ Company - Notes Receivable		$ 469.70
	(Being Notes receivable amount received in full as the last installment)

As seen above, in the Books of accounts of the Bank, Notes issued will be receivable from the customer so asset for the Bank and so, it is debited in the Books of accounts for the Bank and it is issued against the company's name so, company's name is credited as above. Since it is the last installment paid by the company (customer) so, it is closed by the bank as above.