Flipco signed a 10-year note payable on January 1, 2016, of $800,000. The note requires annual principal payments each December 31 of $80,000 plus interest at 5%. The entry to record the annual payment on December 31, 2017, includes
a. a debit to Interest Expense for $36,000.
b. a debit to Interest Expense for $40,000.
c. a credit to Notes Payable for $80,000.
d. a credit to Cash of$ 120,000.
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, 2017.
Answer to Problem 1QC
(a) a debit to Interest expense for $36,000
Explanation of Solution
Record the journal entry for principal payment and interest payment on December 31, 2017:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2017 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, 2016 (1st year).
Calculate interest expense for December 31, 2017 (2nd year).
Hence, options (b), (c), and (d) are incorrect and option (a) is the correct answer.
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