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Only July 1, Shady Creek Resort borrows $330,000 cash by signing a 10-year, 9% installment note...

Question:

Only July 1, Shady Creek Resort borrows {eq}\$330,000 {/eq} cash by signing a {eq}10 {/eq}-year, {eq}9 \% {/eq} installment note requiring equal payments each June of {eq}51,421 {/eq}. What is the journal entry to record the first annual payment?

Long term debt:

Long term debt refers to those borrowings of the company which are taken for long term use and which would be due after period of one financial year. Long term debts are generally raised for purpose of purchasing fixed assets for the organization.

Answer and Explanation:

Date Particular Amount (Dr.) Amount (Cr.)
30 June Notes payable a/c $21,721
Interest payable a/c $29,700
To Cash a/c $51,421
(To record the payment of first installment)
  • Notes payable is a liability and it is decreasing, therefore it is debited.
  • Interest payable is a liability and it is decreasing, therefore it is debited.
  • Cash is an asset and it is decreasing, therefore it is credited.

Working note:

{eq}\begin{align*} \rm\text{Interest} &= \rm\text {Principal amount} \times \rm\text {rate of interest}\\ &= \$ 330,000 \times 9\% \\ &= \$ 29,700 \end{align*} {/eq}

{eq}\begin{align*} \rm\text {Principal paid} &= \rm\text {Installment} - \rm\text {Interest}\\ &= \$ 51,421 - \$ 29,700\\ &= \$ 21,721 \end{align*} {/eq}


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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