Problem 10-13A Grace Herron has just approached a venture capitalist for financi

Question

Problem 10-13A

Grace Herron has just approached a venture capitalist for financing for her new business venture, the development of a local ski hill. On July 1, 2013, Grace was loaned $293,000 at an annual interest rate of 7%. The loan is repayable over 5 years in annual installments of $71,460, principal and interest, due each June 30. The first payment is due June 30, 2014. Grace uses the effective-interest method for amortizing debt. Her ski hill company’s year-end will be June 30.

Period

Cash
Payment

Interest
Expense

Principal
Reduction

Balance

SHOW LIST OF ACCOUNTS

LINK TO TEXT

Date

Account Titles and Explanation

Debit

Credit

SHOW LIST OF ACCOUNTS

LINK TO TEXT

GRACE HERRON
Balance Sheet (Partial)
June 30, 2015

Problem 10-13A

Grace Herron has just approached a venture capitalist for financing for her new business venture, the development of a local ski hill. On July 1, 2013, Grace was loaned $293,000 at an annual interest rate of 7%. The loan is repayable over 5 years in annual installments of $71,460, principal and interest, due each June 30. The first payment is due June 30, 2014. Grace uses the effective-interest method for amortizing debt. Her ski hill company’s year-end will be June 30.

Explanation / Answer

Solution:

Amortization schedule for the 5 years, 2013–2018:

Journal entries for Grace Herron for the first 2 fiscal years ended June 30, 2014, and June 30, 2015:

Balance Sheet presentation of the note payable as of June 30, 2015:

Period Cash Payment (A) Interest Expense @ 7% (B) = (D)*7% Principal Reduction (C) = (A)-(B) Balance (D) = (D)-(C) July 1, 2013 293,000 June 30, 2014 71,460                                                              20,510                                                    50,950                          242,050 June 30, 2015 71,460                                                              16,944                                                    54,516                          187,534 June 30, 2016 71,460                                                              13,127                                                    58,333                          129,201 June 30, 2017 71,460                                                                9,044                                                    62,416                            66,785 June 30, 2018 71,460                                                                4,675                                                    66,785 Total 357,300 64,300 293,000

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