On January 1, 2021, Tropical Paradise borrows $46,000 by agreeing to a 6%, five-year note with the bank. The funds will be used to purchase a new BMW convertible for use in promoting resort properties to potential customers. Loan payments of $889.31 are due at the end of each month with the first installment due on January 31, 2021.
Required:
Record the issuance of the installment note payable and the first two monthly payments.

The issuance of the installment note payable and the first two monthly payments will be:

Debit Cash $46,000

Credit Notes payable $46,000

(Being issuance of notes recorded)

Debit Interest expense $230    

Debit Notes payable $659.31

Credit Cash  $889.31

(Being payment of first installment recorded)

Debit Interest expense $226.70

Debit Notes payable $662.61

Credit Cash  $889.31

It should be noted that the first installment interest expenses will be

= ($46,000 × 6% × 1 month) / 12

= $230

The second installment interest expenses will be

= ($46,000 - $659.31) × 6% × 1 / 12

= $226.70

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Journal entry

Explanation:

The Journal entry is shown below:-

1. Cash Dr,                                            $46,000

   To Notes payable                                         $46,000

(Being issuance of notes is recorded)

2. Interest expense Dr,                     $230    

Notes payable Dr,                              $659.31

    To Cash                                                   $889.31

(Being payment of first installment is recorded)

3. Interest expense Dr,                   $226.70

Notes payable Dr,                           $662.61

    To Cash                                                  $889.31

Working note :-

First installment interest expenses

= $46,000 × 6% × 1 month ÷ 12 month

= $230

Second installment interest expenses

= ($46,000 - $659.31) × 6% × 1 month ÷ 12 month

= $45,340.68 × 6% × 1 ÷ 12

= $226.70

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