Question

On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:
1. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
2. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
3. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Gash $17,000.
4. Debit Notes Payable $14,238; credit Gash $14,238.
5. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Gash $14,238

Answer 1

Answer:

1. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.

Explanation:

The journal entry is shown below:

Note payable A/c Dr $7,238

Interest expense A/c Dr $7,000

  To Cash A/c $14,238

(Being the first payment on the note is recorded)

The computation of the interest expense is shown below:

= Borrowed amount × rate of interest

= $100,000 × 7%

= $7,000

And, the remaining balance left is reported in the note payable account