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These are the journal entries:
On January 1, Patterson Inc. borrowed $2,400,000 on a 15-year mortgage note payable with 10% interest. The note payable must be disclosed as a liability on the financial statements of Patterson Inc. The Company got $2,400,000 in cash for the Note Payable.
What is a note payable ?
A loan that requires interest repayment is known as a note payable. It is listed on the balance sheet as a liability. The note payable is categorized as a short-term liability if it is due within the year.
A) Here is the journal entry:
Cash A/c Dr $2,400,000
To notes payable $2,400,000
B) The first of two equal semiannual installments of $156,122 toward the note is made by Patterson, Inc. on June 30.
The formula to calculate the amount of interest expense recorded is: ($2,400,000 - $0) x 10% x (6 / 12) = $120,000 (Principal - Principal Payments to Date) x Interest Rate x (Current Period Months Outstanding / 12)
The following formula is used to calculate the principal payment:
Principal Payment = Total Payment - Interest Payment
$156,122 - $120,000 = $36,122
The entry is as follows:
Notes payable A/c Dr $36,122
Interest expense A/c Dr $120,000
To Cash Account $156,122
C) Patterson, Inc. pays the second of two equal semiannual installments of $156,122 on the note payable on December 31. The asset value decreases as money is taken out of the company's bank account. The difference between the total payment and the portion of the payment that is related to interest expense is deducted from the principal balance of the note payable. Interest expense is recognized for six months.
Current Period Interest Expense ($2,400,000 - $36,122) x 10% x (6 / 12) = $118,193.9. The formula to calculate the amount of interest expense recorded is (Principal - Principal Payments to Date) x Interest Rate x (Current Period Months Outstanding / 12)
Total Payment - Interest Payment = Principal Payment is the formula used to calculate the amount of principal that must be paid.
$120,000 - $118,193.9 = $1806.1
The journal entry is as follows:
Notes Payable A/C Dr. $1806.1
Interest Expense A/C Dr. $118,193.9
To Cash A/C Dr. $156,122
Once more, this implies that interest expenditure is recorded every six months rather than every month. The interest payable account would be debited rather than interest expense if interest expense was recorded on a monthly basis.
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