Question

Borrow $118,000 from captive credit corporation. The installment note bears interest at 6% annually and matures in 5 years. Payments of $2,281 are required at the end of each month for 60 months. Record the issuance of the long-term note payable.

Answer 1

The student's loan is recorded by debiting cash and crediting notes payable for $118,000. Monthly payments will pay off interest and principal over 5 years at a 6% annual rate.

Step-by-step explanation:

To record the issuance of the long-term note payable in the student's scenario, an accountant would make the following journal entry at the time the loan is taken out:

• Debit Cash $118,000
• Credit Notes Payable $118,000

This entry reflects a loan of $118,000 received from a captive credit corporation by the student. The note payable is set up with a 6% annual interest rate and is to be repaid over 5 years with monthly payments. Therefore, this would be the initial recognition of the liability.

With each monthly payment of $2,281, part of it will go towards paying off the interest, and the remaining amount will reduce the principal balance of the note payable. The specific allocation between principal and interest will change over time, as with each payment, the balance of the principal owed decreases, thereby reducing the interest portion of subsequent payments.