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FinanceCo lent $8 million to Corbin Construction on January 1, 2018, to construct a playground. Corbin...

FinanceCo lent $8 million to Corbin Construction on January 1, 2018, 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, 2018. 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, 2018. 4. Prepare the journal entry for the third installment payment on December 31, 2020.

Solutions

Expert Solution

1.

Date General Journal Debit Credit
1-Jan-18 Notes receivable 8,000,000.00
Cash 8,000,000.00

2. Amortization schedule:

Dec 31 Cash payment Effective interest Decrease in balance Outstanding balance
8,000,000.00
2018 2,992,881.00 480,000.00 2,512,881.00 5,487,119.00
2019 2,992,881.00 329,227.00 2,663,654.00 2,823,465.00
2020 2,992,881.00 169,416.00 2,823,465.00
8,978,643.00 978,643.00 8,000,000.00

Calculations and explanations:

8,000,000/2.67301 (PVA of $1 for n = 3 and i = 6%) = 2,992,881. This is the installment payment.

So for 1st year i.e. 2018: cash payment = 2,992,881. Effective interest = 0.06*8,000,000 = 480,000. Thus balance reduction = 2,992,881-480,000 = 2,512,881. Similary calculations have been done for 2019 and 2020.

3.

Date General Journal Debit Credit
31-Dec-18 Cash 2,992,881.00
Notes receivable 2,512,881.00
Interest revenue 480,000.00

Calculations for the above figures have already been shown above.

4.

Date General Journal Debit Credit
31-Dec-20 Cash 2,992,881.00
Notes receivable 2,823,465.00
Interest revenue 169,416.00

Calculations and explanations:

Dec 31 Cash payment Effective interest Decrease in balance Outstanding balance
8,000,000.00
2018 2,992,881.00 480,000.00 2,512,881.00 5,487,119.00
2019 2,992,881.00 329,227.00 2,663,654.00 2,823,465.00
2020 2,992,881.00 169,416.00 2,823,465.00
8,978,643.00 978,643.00 8,000,000.00

jeff jeffy answered 2 years ago
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