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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for installment note transactions

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:

Year1  
Jan. 1. Issued the note    for cash at its face amount.
Dec. 31. Paid the annual payment on the note, which consisted of interest of $7,200 and principal of $21,288.

Year 4

 
Dec. 31. Paid the annual payment on the note, including $3,134 of interest. The remainder of the payment reduced the principal balance on the note.

To determine

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.

To Journalize:

  • The issuance of the installment note for cash at face amount.
  • The annual payment on the note.
  • The annual payment on the note
Explanation

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

Date Account 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)      
  • 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.

Date Account 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)      
  • Notes Payable is a liability and it is decreased. So, debit it for $21,288.
  • Interest expense is a component of stockholders’ equity and it decreases the stockholders’ equity value...

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