On January 1, 2014, Parker Company obtained a $125,000, four-year, 6% installment note from Clark Bank.

On January 1, 2014, Parker Company obtained a $125,000, four-year, 6% installment note from Clark Bank. The note requires annual payments of $36,074, beginning on December 31, 2014.

a. Prepare an amortization table for this installment note, similar to the one presented in Exhibit 3.

b. Journalize the entries for the issuance of the note and the four annual note payments.

c. Describe how the annual note payment would be reported in the 2014 income statement.


Answer:

a. Amortization of Installment Notes
A B C D E
Decrease Dec. 31
For the January 1 Note Interest Expense in Notes Carrying
Year Carrying Payment (6% of January 1 Payable Amount
Ending Amount (Cash Paid) Note Carrying Amount) (B – C) (A – D)
Dec. 31, 2014 $125,000 $ 36,074 $ 7,500 (6% of $125,000) $ 28,574 $96,426
Dec. 31, 2015 96,426 36,074 5,786 (6% of $96,426) 30,288 66,138
Dec. 31, 2016 66,138 36,074 3,968 (6% of $66,138) 32,106 34,032
Dec. 31, 2017 34,032 36,074 2,042 (6% of $34,032) 34,032 0
$144,296 $19,296 $125,000

b.
 2014
Jan. 1 Cash 125,000
Notes Payable 125,000
Dec. 31 Interest Expense 7,500
Notes Payable 28,574
Cash 36,074
2015
Dec. 31 Interest Expense 5,786
Notes Payable 30,288
Cash 36,074
2016
Dec. 31 Interest Expense 3,968
Notes Payable 32,106
Cash 36,074
2017
Dec. 31 Interest Expense 2,042
Notes Payable 34,032
Cash 36,074

c. Interest expense of $7,500 would be reported on the income statement.