Question

On January 1, Year 1, Stratton Company borrowed $230,000 on a 10-year, 8% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $34,277 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is:

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

Interest Expense Dr, $17,130

Notes Payable Dr, $17,147

            To Cash $34,277

(Being annual amount paid is recorded)

Here we debited the interest expenses and notes payable as it increased the expense and reduced the liabilities and we credited the cash as  it also decreased the assets

Working note

For 31 Dec Year 1

Interest expenses = ($230,000 × 8%) = 18,400

Principal paid = $34,277 - $18,400 = $15,877

Ending balance = $230,000 - $15,877 = $214,123

For 31 Dec Year 2

Interest expenses = ($214,123 × 8%) = $17,130

Principal paid = $34,277 - $17,130 = $17,147