Question

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. Which of the following shows the journal entry necessary to recognize the cash payment on December 31, Year 1? Note: the amounts shown in the journal entries are rounded to the nearest whole dollar.(A) debit: interest expense $8,000; notes payable $6,903; credit: cash $14,903(B) debit: interest expense $8,000; cash $6,903; credit: notes payable $14,903(C) debit: interest expense $14,903; credit: cash $14,903(D) debit: notes payable $14,903; credit: cash $14,903

Answer 1

Answer:

(A) debit: interest expense $8,000; notes payable $6,903; credit: cash $14,903

Explanation:

Provided annual payment = $14,903

Interest for first year = $100,000 $\times$ 8% = $8,000

Therefore principal = $14,903 - $8,000 = $6,903

When the cash payment will be made, then

Interest as an expense amounting $8,000 will be debited as all expenses and losses are debited.

Principal payment of notes issued will also be debited, as this was liability and a part of liability is settled therefore, it will be reversal of creating liability that is debit by amount of $6,903

Also there is cash payment therefore, because of cash payment asset will be decreased, cash account will be credited by amount = $14,903

Journal Entry

Interest Expense Dr. $8,000

Notes Payable Dr. $6,903

               To Cash A/c                     $14,903

Therefore correct option is

(A) debit: interest expense $8,000; notes payable $6,903; credit: cash $14,903