Question

FinanceCo lent $8.6 million to Corbin Construction on January 1, 2021, to construct a playground. Corbin signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Prepare the journal entry for FinanceCo’s lending the funds on January 1, 2021.
2. Prepare an amortization schedule for the three-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2021.
4. Prepare the journal entry for the third installment payment on December 31, 2023.

Answer 1

Solution 1:

Finance Co
Journal Entries
Date	Particulars	Debit	Credit
1-Jan-21	Note receivables Dr	$8,600,000.00
	To Cash		$8,600,000.00
	(To record money lent)

Solution 2:

Annual installment payments = $8,600,000 / Cumulative PV factor at 6% for 3 periods

= $8,600,000 / 2.67301 = $3,217,347

Payment Date	Installment amount	Interest	Reduction in Principal	Carying value of note
1-Jan-21				$8,600,000
31-Dec-21	$3,217,347	$516,000	$2,701,347	$5,898,653
31-Dec-22	$3,217,347	$353,919	$2,863,428	$3,035,225
31-Dec-23	$3,217,347	$182,122	$3,035,225	$0

Solution 3:

Finance Co
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Cash Dr	$3,217,347.00
	To Note receivables		$2,701,347.00
	To Interest revenue		$516,000.00
	(To record receipt of installment)

Solution 4:

Finance Co
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-23	Cash Dr	$3,217,347.00
	To Note receivables		$3,035,225.00
	To Interest revenue		$182,122.00
	(To record receipt of installment)