Chapter 10, Problem 11E

To determine

Prepare the journal entry to record issuance of notes.

Explanation of Solution

Prepare the journal entry to record issuance of notes as follows:

Date	Account titles and Explanation	Debit	Credit
January 1, 2015	Cash	$100,000
	Notes payable		$100,000
	(To record issuance of notes payable)

Table (1)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $100,000.
• Notes payable is a short term liability, and it is increased. Therefore, credit notes payable account for $100,000.

Journalize the first note payment on December 31, 2015, as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2015	Notes Payable		22,523 (2)
	Interest Expense		7,000 (1)
	Cash			29,523
	(To record the first payment of bonds payable with due interest)

Table (2)

Working Notes:

Interest expense for one year is computed as below:

$\begin{array}{l}\text{Interest expense = Notes payable}\times \text{Annual interest rate}\\ \text{ = \$100,000}\times 7\text{\%}\\ \text{ = \$7,000}\end{array}$ (1)

Calculate the portion of notes payable paid.

Interest expense = $7,000

Four equal payments = $29,523

$\begin{array}{c}\text{Portion of notes payable paid = Four equal payments}-\text{Interest expense}\\ \text{=}\text{\$29,523}-\$7,000\\ \text{= \$22,523}\end{array}$ (2)

• Notes Payable is a liability and decreased, so debit it for $22,523.
• Interest expense is a component of stockholders’ equity and decreased it, so debit interest expense for $7,000.
• Cash is an asset and decreased, so credit it for $29,523

Journalize the second note payment on December 31, 2016, as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Notes Payable		24,100 (4)
	Interest Expense		5,423 (3)
	Cash			29,523
	(To record the second payment of bonds payable with due interest)

Table (3)

Working Notes:

Interest expense for second year is computed as below:

$\begin{array}{c}\text{Interest expense = Net notes payable}\times \text{Annual interest rate}\\ \text{ = }\left(\text{\$100,000}-\$22,523\right)\times 7\text{\%}\\ \text{ = \$77,477}\times 7\text{\%}\\ =\$5,423\end{array}$ (3)

Calculate the portion of notes payable paid.

Interest expense = $5,423

Four equal payments = $29,523

$\begin{array}{c}\text{Portion of notes payable paid = Four equal payments}-\text{Interest expense}\\ \text{=}\text{\$29,523}-\$5,423\\ \text{= \$24,100}\end{array}$ (4)

• Notes Payable is a liability and decreased, so debit it for $24,100.
• Interest expense is a component of stockholders’ equity and decreased it, so debit interest expense for $5,423.
• Cash is an asset and decreased, so credit it for $29,523

Journalize the third note payment on December 31, 2017, as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Notes Payable		25,787 (6)
	Interest Expense		3,736 (5)
	Cash			29,523
	(To record the third payment of bonds payable with due interest)

Table (4)

Working Notes:

Interest expense for third year is computed as below:

$\begin{array}{c}\text{Interest expense = Net notes payable}\times \text{Annual interest rate}\\ \text{ = }\left(\text{\$100,000}-\$22,523-\$24,100\right)\times 7\text{\%}\\ \text{ = \$53,377}\times 7\text{\%}\\ \text{=}\text{\$3,736}\end{array}$ (5)

Calculate the portion of notes payable paid.

Interest expense = $3,736

Four equal payments = $29,523

$\begin{array}{c}\text{Portion of notes payable paid = Four equal payments}-\text{Interest expense}\\ \text{=}\text{\$29,523}-\$3,736\\ \text{= \$25,787}\end{array}$ (6)

• Notes Payable is a liability and decreased, so debit it for $25,787.
• Interest expense is a component of stockholders’ equity and decreased it, so debit interest expense for $3,736.
• Cash is an asset and decreased, so credit it for $29,523

Journalize the fourth note payment on December 31, 2018, as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Notes Payable		27,590 (8)
	Interest Expense		1,933 (7)
	Cash			29,523
	(To record the fourth payment of bonds payable with due interest)

Table (5)

Working Notes:

Interest expense for fourth year is computed as below:

$\begin{array}{c}\text{Interest expense = Net notes payable}\times \text{Annual interest rate}\\ \text{ = }\left(\text{\$100,000}-\$22,523-\$24,100-\$25,787\right)\times 7\text{\%}\\ \text{ = \$27,590}\times 7\text{\%}\\ \text{=}\text{\$1,931}\end{array}$ (7)

Calculate the portion of notes payable paid.

Interest expense = $1,933

Four equal payments = $29,523

$\begin{array}{c}\text{Portion of notes payable paid = Four equal payments}-\text{Interest expense}\\ \text{=}\text{\$29,523}-\$1,933\\ \text{= \$27,590}\end{array}$ (8)

• Notes Payable is a liability and decreased, so debit it for $27,590.
• Interest expense is a component of stockholders’ equity and decreased it, so debit interest expense for $1,933.
• Cash is an asset and decreased, so credit it for $29,523