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 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 . A period of three months would be stated as . 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 $15,000, 5.5%, 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 $49,000, 4% 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 . The amount of principal that is repaid with each successive payment . 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 May 1, Mannerino Engineering signed a 4.0% mortgage (installment) note for $290,000. The monthly payment of $1,400 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 May 31 $ $ $ $ $ Jun. 30 Jul. 31 The journal entry for the June 30 payment includes a to Mortgage Payable for $ , a to Cash for $ , and a to 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 Cash