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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 11E
Textbook Problem
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On January 1, Year 1, Luzak Company issued a $120,000, five-year, 6% installment note to McGee Bank. The note requires annual payments of $28,488, beginning on December 31, Year 1. Journalize the entries to record the following:

Chapter 14, Problem 11E, On January 1, Year 1, Luzak Company issued a 120,000, five-year, 6% installment note to McGee Bank.

To determine

Journalize the given transactions.

Explanation of Solution

Long-term notes payable: Long-term notes payable represent a legal and written promise made by the business to pay a debt with interest over a period of more than a year. It is reported under the long-term liability section of the balance sheet.

Installment note: It is a debt in which the borrower is required to pay equal periodic payments to the lender based on the term of the note.

Prepare journal entry to record the issuance of the installment note.

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

Year 1,

January 1

Cash 120,000 
 Notes Payable  120,000
 (To record the issuance of 6% note payable for cash at face amount)   

Table (1)

  • Cash is an asset and it is increased. So, debit cash for $120,000.
  • Notes Payable is a liability and it is increased. So, credit Notes payable for $120,000.

Journalize the annual payment on the note.

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

Year 1,

December 31

Notes Payable 21,288 
 Interest Expense 7,200 
          Cash  28,488
 (To record the payment of notes payable with due interest)   

Table (2)

  • Notes Payable is a liability and it is decreased...

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Chapter 14 Solutions

Financial Accounting
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