Chapter 12, Problem 7EA

Homeland Plus specializes in home goods and accessories. In order for the company to expand its business, the company takes out a long-term loan in the amount of $650,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 8.5%. Each year on December 31, the company pays down the principal balance by $80,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year.

A. Determine the outstanding principal balance on December 31 of the first year that is computed for interest.

B. Compute the interest accrued on December 31 of the first year.

C. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.