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12 May, 05:49

On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the payment of the first annual amount due on the note would include a

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  1. 12 May, 09:08
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    The journal entry to record the first annual amount due is as follows:

    Dr Interest expense $11,550

    Dr Notes payable $11,942

    Cr Cash $23,492

    Being repayment of loan principal with interest

    Explanation:

    The interest payment implies an increase in expense which means the expense account must be debited, while the repayment of principal of $11,942 represents a reduction in amount owed to Guarantee Bank, hence it is also debited to notes payable account.

    The sum of the two cash outflows is credited to cash account, since cash had in reduction due loan obligations being discharged as and when due.

    The principal repayment means that the balance in the notes payable account is $153,058 ($165,000-$11,942)
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