Question

Little Company borrowed $56,000 from Sockets on January 1, 2018, and signed a three-year, 7% installment note to be paid in three equal payments at the end of each year. The present value of an ordinary annuity of $1 for 3 periods at 7% is 2.62432. Required: 1. Prepare the journal entry on January 1, 2018, for Sockets’ lending the funds. 2. Calculate the amount of one installment payment. 3. Prepare an amortization schedule for the three-year term of the installment note. 4. Prepare the journal entry for Sockets’ first installment payment received on December 31, 2018. 5. Prepare the journal entry for Sockets’ third installment payment received on December 31, 2020.

Answer 1

Solution 1:

Journal Entries - Sockets
Date	Particulars	Debit	Credit
1-Jan-18	Note receivables Dr	$56,000.00
	To Cash		$56,000.00
	(Being loan given to little company)

Solution 2:

Amount of one installment payment = Loan amount / Cumulative PV factor at 7% for 3 periods

= $56,000 / 2.62432 = $21,339

Solution 3:

Loan Amortization schedule
Date	Installment amount	Interest	Principal payment	Carrying value
1-Jan-18				$56,000
31-Dec-18	$21,339	$3,920	$17,419	$38,581
31-Dec-19	$21,339	$2,701	$18,638	$19,943
31-Dec-20	$21,339	$1,396	$19,943	$0

Solution 4:

Journal Entries - Sockets
Date	Particulars	Debit	Credit
31-Dec-18	Cash Dr	$21,339.00
	To Note receivables		$17,419.00
	To Interest revenue		$3,920.00
	(To record installment received)

Solution 5:

Journal Entries - Sockets
Date	Particulars	Debit	Credit
31-Dec-20	Cash Dr	$21,339.00
	To Note receivables		$19,943.00
	To Interest revenue		$1,396.00
	(To record receipt of 3rd installment)