# 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. BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 BuyFind ### Accounting 27th Edition WARREN + 5 others Publisher: Cengage Learning, ISBN: 9781337272094 #### Solutions Chapter Section Chapter 14, Problem 14.11EX Textbook Problem ## Entries for installment note transactionsOn 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.

Expert Solution
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 of Solution

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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