Chapter 12, Problem 1QC

To determine

Long-Term Notes Payable: Long-term notes payable refers to the obligation of the company in the form of notes to be paid after one year or one operating cycle whichever is longer. Generally the long-term notes payable is reported in the long-term liabilities section of the balance sheet.

To identify: The correct journal entry to record annual payment on December 31, 2019.

Explanation of Solution

 (a) a debit to Interest expense for $36,000

Record the journal entry for principal payment and interest payment on December 31, 2017:

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2019 December	31	Notes Payable				80,000
		Interest Expense				36,000
			Cash				116,000
				(To record the payment of  principal and interest)

Table (1)

Working notes:

Calculate interest expense for December 31, 2018 (1^st year).

$\begin{array}{c}\text{Interest expense}=\left(\begin{array}{l}\text{Beginning balance on January 1, 2018 }\\ \times \text{ Interest rate }\times \text{Time}\end{array}\right)\\ =\$800,000\times \frac{5}{100}\times 1\text{year}\\ =\$40,000\end{array}$

Calculate interest expense for December 31, 2019 (2^nd year).

$\begin{array}{c}\text{Interest expense}=\left(\begin{array}{l}\text{Beginning balance on January 1, 2019 }\\ \times \text{Interest rate}\times \text{Time}\end{array}\right)\\ =\left(\$800,000-\$80,000\right)\times \frac{5}{100}\times 1\text{year}\\ =\$36,000\end{array}$

Conclusion

Hence, options (b), (c), and (d) are incorrect and option (a) is the correct answer