Question

Pockets lent $20,000 to Lego Construction on January 1, 2018. Lego signed a three-year, 5% installment note to be paid in three equal payments at the end of each year.

Required:

(1.)    Prepare the journal entry on January 1, 2018, for Pockets' 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 Pockets' journal entry for the first installment payment on December 31, 2018.

(5.)    Prepare Pockets' journal entry for the third installment payment on December 31, 2020.

Answer 1

(1.)

Date	General Journal	Debit	Credit
January 01,2018	Note Receivable	$20,000
	Cash		$20,000
	(To record lending of funds)

(2.)

Installment Payment calculation:-

$20,000 (amount of loan)

÷

2.72325 (n=3 ,i =5%)

=

$7,344 (installment payment)

(3.)

Amortization schedule:-

	Cash payment	Effective interest (5% × outstanding balance)		Decrease in balance	outstanding balance
					$20,000
2018	$7,344	$20,000 ×5% =	$1,000	$6,344 ($7,344 -$1,000)	$13,656 ($20,000- $6,344)
2019	$7,344	$13,656 ×5% =	$683	$6,661 ($7,344 -$683)	$6,995 ($13,656 - $6,661)
2020	$7,344	$6,995 ×5% =	$349	$6,995 ($7,344 - $349)	0
	$22,032		$2,032	$20,000

(4.)

Date	General Journal	Debit	credit
December 31,2018	cash (payment determine above)	$7,344
	Notes Receivable (difference)		$6,344
	Interest revenue (5% × outstanding balance)		$1,000
	(To record first installment)

(5.)

Date	General Journal	Debit	Credit
December 31,2020	cash (payment determine above)	$7,344
	Notes Receivable (difference)		$6,995
	Interest revenue (5% × outstanding balance)		$349
	(To record third installment)