Question

On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is:

Answer 1

Computation of the interest expense using the equation as shown below:

Interest expense for year 1 = Notes payable * Interest rate

= $100,000 * 10%

= $7,000

​

Notes payable reduction in Year 1 = $14,238 - $7,000

= $7,238

General journal entry

Item Debit Credit

Notes payable $7,745

Interest expense $6,493

Cash $14,238

Workings

Interest expense = ($100,000 - $7,238) * 7%

= $92,762 * 7%

=$6,493