Answer
A₁ - Journal entry at the time of issue of installment note for cash:
Bank A/c Dr $85,000
To Notes Payable Cr $85,000
A₂– Journal entry at the time of first annual payment:
Notes Payable A/c Dr $9,822
Interest Expense A/c Dr $5,950
To Bank A/c Cr $15,772
Notes payable to be reported in balance sheet at the end of fiscal year:
Notes payable end balance = $85,000 - $9,822 = $75,178
Interest for 2nd year = $75,178 * 7% = $5,262
Installment amount for 2nd year = $15,772
Principal repayment for 2nd year = $15,772 - $5,262 = $10,510
Therefore out of $75,178 notes payable, $10,510 is payable within 1 year.
There $10510 will be shown in balance sheet as current liabilities and
remaining $64,668 will be shown in balance sheet as long term liability.
