Answer:
1. The Journal entries are as follows:
(a) On May 1, 2018
Equipment A/c Dr. $96,000
To Notes payable $96,000
(To record the Issuance of Note Payable)
(b) On December 31, 2018
Interest expense A/c Dr. $3,840
To interest payable $3,840
(To record the accrue interest at the end of the year)
Time period: May 1, 2018 to December 31, 2018 = 8 months
Interest expense:
= $96,000 × 0.06 × (8/12)
= $3,840
(c) On May 1, 2019
Notes payable A/c Dr. $12,000
Interest payable A/c Dr. $3,840
Interest expense A/c Dr. $1,920
To cash $17,760
(To record the first installment on notes payable)
Time period: January 1, 2019 to April 30, 2019 = 4 months
Interest expense:
= $96,000 × 0.06 × (4/12)
= $1,920
(d) On December 31, 2019
Interest expense A/c Dr. $3,360
To interest payable $3,360
(To record the accrue interest at the end of the year)
Time period: May 1, 2019 to December 31, 2019 = 8 months
Interest expense:
= ($96,000 - $12,000) × 0.06 × (8/12)
= $84,000 × 0.06 × (8/12)
= $3,360
2. Liability at December 31, 2019:
= $3,360
