Final answer:
Middling Company would record the issuance of a $30,000 note payable with an entry debiting Cash and crediting Notes Payable. Monthly payments of $704.55, starting January 31, 2024, would be recorded, dividing each payment into interest and principal portions, debiting Interest Expense and Notes Payable, and crediting Cash.
Step-by-step explanation:
When Middling Company borrows $30,000 at a 6% interest rate for 4 years, making monthly payments of $704.55, the accounting records must reflect this transaction accurately. On January 1, 2024, the company would record the note as follows:
-
- Debit Cash: $30,000
-
- Credit Notes Payable: $30,000
This entry reflects the influx of cash from the loan. Each monthly payment consists of both principal and interest. For the first payment on January 31, 2024, part of the $704.55 covers the interest, and the remainder reduces the principal.
Assuming a simple method to apportion interest and principal (though actual amounts would be determined by an amortization schedule), one might record:
-
- Debit Interest Expense: [Interest Portion]
-
- Debit Notes Payable: [Principal Portion]
-
- Credit Cash: $704.55
Similarly, for the second payment, a similar entry would be made:
-
- Debit Interest Expense: [Interest Portion for second month]
-
- Debit Notes Payable: [Principal Portion for second month]
-
- Credit Cash: $704.55
It is important to create an amortization schedule to accurately distribute the payments between interest and principal.