How to Account for an Installment Note

With installment notes, the borrower is periodically paying down the principal (in installments) instead of paying the principal with a single, lump-sum payment when the note matures.
The borrower makes periodic payments, with a portion of each payment going toward interest and the remainder being applied to the outstanding principal.
While there are exceptions, the periodic payment is typically the same amount each period.
You calculate the amount of the installment payment as follows:
installment payment = amount received by the borrower / { [1 - (1+r)^-n] / r }
With installment notes, the periodic payments are larger than they would be if the note called for the entire face value to be due upon maturity. The periodic payment is higher because the borrower is not only paying interest each period but is also paying down the principal.
If you create an amortization table, you will see that the outstanding balance does NOT eventually become the face value of the note. Instead, the outstanding balance is reduced to zero. This is because the amount of the installment payment is calculated in such a way that the outstanding principle is reduced to zero by the maturity date.
Also, for notes issued at a discount or premium, companies don't always track the discount or premium. Thus, in the first example provided in this video, I don't track the discount or premium separately.
0:00 Introduction
0:55 How to calculate the installment payment
1:20 Example #1 (installment note with semiannual payments issued at a discount)
2:46 Journal entry for issuance of the note
4:42 Amortization table for the note
6:26 Journal entry for the first installment payment
7:15 Example #2 (installment note with annual payments issued at par)
-
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
-
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* eepurl.com/dIaa5z
-
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
-
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* edspira.thinkific.com
-
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: podcasts.apple.com/us/podcast...
* Spotify: open.spotify.com/show/4WaNTqV...
* Website: www.edspira.com/podcast-2/
-
GET TAX TIPS ON TIKTOK
* / prof_mclaughlin
-
ACCESS INDEX OF VIDEOS
* www.edspira.com/index
-
CONNECT WITH EDSPIRA
* Facebook: / edspira
* Instagram: / edspiradotcom
* LinkedIn: / edspira
-
CONNECT WITH MICHAEL
* Twitter: / prof_mclaughlin
* LinkedIn: / prof-michael-mclaughlin
-
ABOUT EDSPIRA AND ITS CREATOR
* www.edspira.com/about/
* michaelmclaughlin.com

[@MichaelOnRockyTop]

Going through Intermediate 2 right now Mr. McLaughlin, and this is in the second chapter. Thank you so much.