Accounting for a long-term note payable On January 1, 2016, Locker-Farrell signed a $200,000,...

Question:

Accounting for a long-term note payable On January 1, 2016, Locker-Farrell signed a $200,000, 10-year, 13% note. The loan required Locker-Farrell to make annual payments on December 31 of $20,000 principal plus interest.

Requirements:

1. Journalize the issuance of the note on January 1, 2016.

2. Journalize the first note payment on December 31, 2016.

Long-Term Debt:

Long-term debt refers to the borrowings of the company that will be repaid after a period of 12 months and the examples include bank loans, long-term notes payable, issuance of debt, etc. Long-term notes payable is a promissory note issued by the company to the lender to pay the principal and the accrued interest on a specified date in the future.

Answer and Explanation:

Answer:

Journal entries in the books of Locker-Farrell are made below:

Requirement Date General Journal Debit Credit
1 January 1, 2016 Cash $200,000
Notes Payable $200,000
(to record the issuance of note)
2 December 31, 2016. Notes Payable $20,000
Interest expense $26,000
Cash $46,000

Explanation:

Interest expense = Face value of note * Interest rate

Interest expense = $200,000 * 13%

Interest expense = $26,000


Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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