It is important to note that the total monthly cash payment (column A) does not change from to period. What does change, however, is the portion of the cash payment allocated to interest expense each month (column B) versus me amount by which te outstanding loan balance is reduced (column Rather than continuing to make monthly’ payments, King’s Inn could settle this liability at any time by paying the amount currently shown as the unpaid balance. Notice that the amount of interest expense listed in column B changes every month. In our illustration, the interest expense is decreasing each month. because the unpaid balance is continually decreasing. the monthly payments were less thin the amount of the monthly interest expense. the unpaid balance the note would increase each month. This, in turn. would cause the interest expense to increase each month.
This pattern, termed negative amortization, occurs temporarily in some “adjustable Horne mortgages Preparing each horizontal line in an amortization table involves making the same computations.based on a new unpaid balance. Thus an amortization table of any length can be easily and quickly prepared by computer. (Most “money management” software includes a program for preparing amortization tables.)
Only three items of data need to be entered into the computer:
(I) the original amount of the liability,
(2) the amount of periodic payments, and (3) the interest rate (per payment period).
Using an Amortization Tabla Once an amortization table has been prepared, the entries to record each payment are taken directly from the amounts shown in the table.
For example, the entry to record the first monthly payment (November 15, Year 1) is:
Interest Expense 164 Installment Note Payable 836 Cash . Made Nov. payment on installment note payable. 1,000 Similarly, the entry to record the second payment, made on December 15, Year 1, is, 433 Payment is allocate between interest and principal Interest Expense 156 Notice that interest expense Installment Note Payable :
844 Is less in December Cash 1,000· Made Dec. payment on installment note payable. At December 31. Year I, King’s Inn should make an adjusting entry to record one half month’s accrued interest on this liability. The amount of this adjusting entry is based on the unpaid balance shown in the amortization table as of the last payment (December 15).
This entry is: Interest Expense 74 Year-end adjusting entry Interest Payable 74 Adjusting entry to record interest expense on installment note for the last half of Dec.: $14.718 x 1″10x 1.h = $74. . The Current Portion of Long-Term Debt Notice that as of December 31, Year I, the unpaid balance of this note is $14,718. As of December 31, Year 2, however, the unpaid balance will be only $3,904. Thus the principal amount of this note will be reduced by $/0,814 during Year 2 ($14,718 .: $3,904 = $10,814). In the balance sheet prepared at December 31, Year 1, the $10,814 portion of this debt that is scheduled for repayment within the next 12 months should be classified as a current liability. The remaining $3,904 should be classified as a long-term liability