Blueprint Problem: Interest Calculations and Installment Notes

Interest Calculations

Three items of information are needed to calculate interest: the principal, the rate, and the time. Of the three items, the time aspect is the most difficult to understand. The rate of interest is always stated on Selecta dailya monthlyan annualCorrect 1 of Item 1 basis.

The formula for calculating interest is:

Principal x Rate x Time

If the time is a portion of a year, such as three months, the Time aspect of the formula must be stated Selectas a portion of a yearin daysin monthsCorrect 2 of Item 1. A period of three months would be stated as Select3/12330%Correct 3 of Item 1. If interest is calculated for a full year, the Time element may be represented as 12/12.

Also remember that if the end of a fiscal period occurs before interest is paid, an entry must be made to record accrued interest expense and interest payable.

APPLY THE CONCEPTS: Calculating interest

For each of the following loan terms, calculate the amount of interest as directed in the question:

A. Calculate the annual interest that will be paid on a $51,000, 2.5%, loan. Enter the interest rate as a percent (not a decimal). When required, round all answers to nearest cent.

Interest = $ x % x / 12 = $

B. Calculate the monthly interest that will be paid on a $82,000, 3.5% loan.

Interest = $ x % x / 12 = $

Installment loans

Most notes payable require that the total amount of interest on the note be paid on the maturity date along with the principal of the note. Installment notes or loans, however, require regular payments to be paid. Each payment covers interest for that period plus the repayment of a portion of the principal amount. The amount of the periodic payment Selectdecreasesincreasesstays the sameCorrect 1 of Item 3. The amount of principal that is repaid with each successive payment Selectdecreasesincreasesstays the sameCorrect 2 of Item 3.

The formula for calculating interest for an installment loan is:

Principal at Beginning of Period x Rate x Time

The only difference between this formula and the previous one is that the principal portion of this formula is the principal at the beginning of the period. This amount is different each period because the outstanding principal decreases with each payment.

Also remember that if the end of a fiscal period occurs before interest is paid, an entry must be made to record accrued interest expense and interest payable.

APPLY THE CONCEPTS: Installment loans

On July 1, Depento Industries signed a 4.25% mortgage (installment) note for $295,000. The monthly payment of $1,500 is due on the last day of each month. Complete the amortization table for the first three loan payments. When required, round your answers to nearest cent.

Amortization Table
Payment Date	Unpaid Balance at Beginning of Month	Monthly Payment	Interest Expense	Reduction in Principal of Debt	Unpaid Balance at End of Period
Jul. 31	$	$	$	$	$
Aug. 31
Sep. 30

The journal entry for the August 31 payment includes a SelectcreditdebitCorrect 1 of Item 5 to Mortgage Payable for $, a SelectcreditdebitCorrect 3 of Item 5 to Cash for $, and a SelectcreditdebitCorrect 5 of Item 5 to SelectInterest ExpenseInterest PayableInterest ReceivableInterest RevenueCorrect 6 of Item 5 for $.

For each account used in the journal entry, select the correct financial statement and the effect on the statement.

Account Title	Balance Sheet	Balance Sheet	Income Statement
Mortgage Payable	SelectDecrease AssetsIncrease AssetsNo EffectCorrect 8 of Item 5	SelectDecrease LiabilitiesIncrease LiabilitiesNo EffectCorrect 9 of Item 5	SelectDecrease Net IncomeIncrease Net IncomeNo EffectCorrect 10 of Item 5
Cash	SelectDecrease AssetsIncrease AssetsNo EffectCorrect 11 of Item 5	SelectDecrease LiabilitiesIncrease LiabilitiesNo EffectCorrect 12 of Item 5	SelectDecrease Net IncomeIncrease Net IncomeNo EffectCorrect 13 of Item 5
SelectInterest ExpenseInterest PayableInterest RevenueInterest ReceivableCorrect 14 of Item 5	SelectDecrease AssetsIncrease AssetsNo EffectCorrect 15 of Item 5	SelectDecrease LiabilitiesIncrease LiabilitiesNo EffectCorrect 16 of Item 5	SelectDecrease Net IncomeIncrease Net IncomeNo EffectCorrect 17 of Item 5