Question

On the first day of the fiscal year, Shiller Company borrowed $85,000 by giving a seven-year, 7% installment note to Soros Bank. The note requires annual payments of $15,772, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $5,950 and principal repayment of $9,822.

Answer 1

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.