Question

On July 1, ABC Company borrowed $440,000 cash by signing a 10-year, 10% installment note requiring equal payments each June 30 of $71,608. What is the journal entry to record the first annual payment? Multiple Choice Debit Interest Expense $44,000; credit Cash $44,000. Debit Interest Expense $71,608; credit Cash $71,608. Debit Cash $440,000; debit Interest Expense $71,608; credit Notes Payable $511,608. Debit Interest Expense $44,000; debit Interest Payable $27,608; credit Cash $71,608. Debit Interest Expense $44,000; debit Notes Payable $27,608; credit Cash $71,608.

Answer 1

Debit Interest Expense $44,000;

Debit Notes Payable $27,608;

Credit Cash $71,608

Step-by-step explanation:

When loan is acquired it increases cash and becomes a liability for the company. So cash is increased by debiting cash with $ 440,000 and liability is also increased by crediting notes payable. As the cash payment for the first year is $71,608 then it is credited .

The journal entry to record the first annual payment is as follows.

Debit Interest Expense $44,000;

Debit Notes Payable $27,608;

Credit Cash $71,608

Interest Expense = 10 % of $ 440,000= $ 44,000

As part of the Notes Payable is paid the notes payable is debited with an amount of $27,608. And cash is credited with an equal amount paid i.e. $ 71,608