In the Excel setup of a loan amortization problem, which of the following typically occurs when recording the first payment in the journal entries?

• A. A debit to Loan Payable and a credit to Interest Expense
• B. A debit to Cash and a credit to Loan Payable
• C. A debit to Interest Expense and Loan Payable, and a credit to Cash
• D. A debit to Interest Expense and a credit to Cash

Answer: (C)

Verified step by step guidance

1. Understand the components of a loan amortization schedule: Loan amortization involves breaking down each payment into principal repayment and interest expense. The journal entry for the first payment reflects these components.
2. Analyze the payment structure: Each payment typically includes an interest expense (cost of borrowing) and a reduction in the loan principal (Loan Payable). The total payment reduces the cash balance.
3. Determine the journal entry: For the first payment, you need to record the interest expense and the reduction in the loan principal as debits, and the cash payment as a credit. This reflects the outflow of cash and the allocation of the payment.
4. Use the correct accounts: Debit 'Interest Expense' to record the cost of borrowing, debit 'Loan Payable' to reduce the principal balance, and credit 'Cash' to reflect the payment made.
5. Verify the logic: Ensure the journal entry aligns with the accounting equation (Assets = Liabilities + Equity). The reduction in cash (asset) corresponds to the decrease in liabilities (Loan Payable) and the recognition of an expense (Interest Expense).