Exercise 7-9A (Algo) Financial statement effects of an installment note LO 7-5

Dan Dayle started a business by issuing an $85,000 face value note to First State Bank on January 1, Year 1. The note had an 7 percent annual rate of interest and a five-year term. Payments of $20,731 are to be made each December 31 for five years.

Required

1. What portion of the December 31, Year 1, payment is applied to interest expense and principal?
2. What is the principal balance on January 1, Year 2?
3. What portion of the December 31, Year 2, payment is applied to interest expense and principal? (Round your answers to the nearest dollar amount.)

\begin{tabular}{|l|l|} \hline a. & Interest expense \\ \hline & Principal \\ \hline b. & Principal balance \\ \hline c. & Interest expense \\ \hline & Principal \\ \hline \end{tabular}