Question

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by $9,542.

The journal entry to record this transaction will include a debit to which of the following accounts and for how much?

a. Interest Payable; $5,600
b. Notes Payable; $9,542
c. Interest Expense; $5,600
d. Cash; $15,142

Answer 1

b. Notes Payable; $9,542

c. Interest Expense; $5,600

Step-by-step explanation:

Given that

Borrowed amount = $70,000

Rate of interest = 8%

Time period = 6 years

Equal payments = $15,142

Interest expense = $5,600

And, principal reduced amount = $9,542

By above information, the following account should be debited

Interest expense = $5,600 and the note payable = $9,542 because for recording the first payment, the entry would be

Note payable A/c Dr $5,600

Interest expense A/c Dr $9,542

To Cash A/c $15,142

(Being the first payment is recorded)

Since the interest is an expense and the note payable increase the liabilities so the same amount is debited while at the same time it reduced the cash balance so we debited the cash account