On November 1, 2011, Leetch Ltd. borrows $400,000 cash from a bank by signing a

Question

On November 1, 2011, Leetch Ltd. borrows $400,000 cash from a bank by signing a five-year installment note bearing 8% interest. The note requires equal total payments each year on October 31. Required: 1. Compute the total amount of each installment payment 2. Complete an amortization table for this installment note 3. Prepare the journal entries in which Leetch records (a) accrued interest as of December 31, 2011 (the end of its annual reporting period), and (b) the first annual payment on the note.

Explanation / Answer

1)

In the table for present value of annuities the factor for 5 periods at 8% interest is 3.9927.
400,000 / 3.9927 = $100,183

2. Complete an amortization table for this installment note
I'll let you do the amortization table.

Prepare the journal entries in which Leetch records the following:

(a) Accrued interest as of December 31, 2011 (the end of its annual reporting period).
400,000 x 8% x 2/12 = $5,333 (rounded) accrued interest expense
Dr Interest Expense 5,333
Cr Interest Payable 5,333

(b) The first annual payment on the note
Ten more months of interest has accrued.
400,000 x 8% x 10/12 = $26,667 accrued interest
Dr Notes Payable 68,183
Dr Interest Expense 26,667
Dr Interest Payable 5,333
Cr Cash 100,183

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