Question

On January 1, 2019, Brooks Inc. borrows $90,000 from a bank and signs a 5% installment note requiring four annual payments of $25,381 at the end of each year. Complete the necessary journal entry on 12/31 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Answer 1

The journal entry is shown below:

Step-by-step explanation:

The journal entry which is to be recorded on 12/31 is as follows:

Notes Payable A/c....................................Dr $20,881

Interest Expense A/c.................................Dr $4,500

Cash A/c.................................................Cr $25,381

On 12/31, the first instalment is to be paid, so the notes payable account will be debited because the liability is reducing, the interest expense account is debited as the interest will be charged for one year and the cash account is credited, there is decrease in assets account as the cash is going out of the business.

Working note:

Interest amount = Borrowed amount × Interest rate

= $90,000 × 5%

= $4,500