On January 1, 2016, Denver Company borrowed $25,000 by issuing a 5-year note to Capital Bank. The note had a 10% annual rate of interest. The loan agreement called for five equal payments of $6,595 on December 31 of each year 2016 through 2020. What is the correct journal entry to record the loan payment on December 31, 2016?

The correct journal entry on Dec 31, 2016 is as follows:

Notes Payable A/c Dr. $4,095

Interest Expense A/c Dr. $2,500

To Cash $6,595

(To record the loan payment on December 31, 2016)

Workings:

Notes Payable Amount = $25,000

Equal Annual Installment to be paid = $6,595

Installment amount includes the interest for the outstanding amount of loan over the life.

Interest on Loan:

= Carrying Value of Loan at the beginning of the year 1 * Rate of Interest 10%

= 25,000 * 10%

= $2,500

Installment Amount = $6,595

Loan Principal Repayment:

= Installment Amount - Interest on Loan

= 6,595 - 2,500

= $4,095

Interest Expense = $2,500