On the first day of the fiscal year, a company issues $65,000, 6%, five-year installment notes,...

Question:

On the first day of the fiscal year, a company issues $65,000, 6%, five-year installment notes, that have annual payments of $15,431. The first note payment consists of $3,900 of interest and $11,531 of principal repayment. Journalize the following transactions. Be sure to include the year in the date for both entries. Refer to the Chart of Accounts, for exact wording of account titles. Jan 1, 2016, Installment notes are issued. Jan 1, 2017, First annual note payment is made.

Installment Notes:

Notes payable are liabilities characterized by their face values and interest rates. Installment notes dictate that the principal borrowed be paid over time along with interest in predetermined installment payments. Each period a portion of the installment payment pays interest on the remaining principal balance at the beginning of the period with the remainder of the payment counting towards principal repayment.

Answer and Explanation:

Date Account Debit Credit Explanation
Jan. 1, 2016 Cash $65,000 Record inflow of cash from issuance
Notes Payable $65,000 Record notes payable at face value
Jan 1, 2017 Notes Payable $11,531 Reduce portion of principal balance upon installment payment
Interest Expense $3,900 Record interest expense for period ($65,000 x 6%)
Cash $15,431 Record outflow of cash

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