On January 1, 2021, Tropical Paradise borrows $48,000 by agreeing to a 5%, five-year note with the bank. The funds will be used to purchase a new BMW convertible for use in promoting resort properties to potential customers. Loan payments of $905.82 are due at the end of each month with the first installment due on January 31, 2021.

Required:
Record the issuance of the installment note payable and the first two monthly payments.

On January 1 2021, debit Cash with $48,000; credit Notes Payable with $48,000  

On January 31, 2021, debit Interest Expense with $200, debit Notes Payable with $705.82; and credit Cash with $905.82.

On February 28, 2021, debit Interest Expense with $197.06, debit Notes Payable with $708.76; and credit Cash with $905.82.

Explanation:

Note: See the attached file for how the journal entries will appear in the book.

Interest paid on January 31, 2021 = $48,000 × (5% ÷ 12) = $200

Principal repaid on January 31, 2021 = $905.82 - $200 = $705.82

Interest paid on February 28, 2021 = ($48,000 - $705.82) × (5% ÷ 12) = $197.06

Principal repaid on February 28, 2021 = $905.82 - $197.06 = $708.76