Chapter 14, Problem 5PSA

Sub Part-1

To determine

Amortization table:

The Note payable issued on borrowing of money may have a payment obligation of fixed amount at an regular interval over the life of note payable. In such cases, the fixed amount to be paid must be divided in to two components: Interest payment on the principal outstanding amount in the beginning of respective period and balance being principal repayment. The interest payment need to be computed on the balance outstanding in the beginning of the respective period at the stated rate of interest for the length of period. The interest so computed is deducted from the fixed amount to arrive at principal repayment which need to be deducted from the outstanding amount so as to compute the new balance of outstanding balance for the next period.

The Amortization table shall be prepared.

Sub Part-2.

To determine

Accounting treatment on issuance of notes payable:

TheNote payable issued on borrowing of money may have a payment obligation of fixed amount at a regular interval over the life of note payable. In such cases, the amount borrowed shall be debited to the cash account and a liability is created by crediting the notes payable account to be repaid at a regular interval of time along with interest.

After the issuance of notes payable, the fixed amount is paid at regular interval which need to be divided in to two parts i.e. interest expenses and principal repayment (as mentioned in amortization chart). In such cases, thee interest expenses account is debited with the amount of interest computed and Notes payable account is debited with the principal repayment and the credit being given to the cash account.

The Journal entries for the accrued interest at year end and annual amount repayments.