Chapter 12, Problem 1QC

Flipco signed a 10-year note payable on January 1, 2016, of $800,000. The note requires annual principal payments each December 31 of $80,000 plus interest at 5%. The entry to record the annual payment on December 31, 2017, includes

a. a debit to Interest Expense for $36,000.

b. a debit to Interest Expense for $40,000.

c. a credit to Notes Payable for $80,000.

d. a credit to Cash of$ 120,000.

To determine

Long-Term Notes Payable: Long-term notes payable refers to the obligation of the company in the form of notes to be paid after one year or one operating cycle whichever is longer. Generally the long-term notes payable is reported in the long-term liabilities section of the balance sheet.

To identify: The correct journal entry to record annual payment on December 31, 2017.

Answer to Problem 1QC

(a) a debit to Interest expense for $36,000

Explanation of Solution

Record the journal entry for principal payment and interest payment on December 31, 2017:

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
2017 December	31	Notes Payable				80,000
		Interest Expense				36,000
			Cash				116,000
				(To record the payment of  principal and interest)

Table (1)

Working notes:

Calculate interest expense for December 31, 2016 (1^st year).

$\begin{array}{c}\text{Interest expense = }\left\{\begin{array}{l}\text{Beginning balance on January 1, 2016 }\times \\ \text{Interest rate }\times \text{ Time period}\end{array}\right\}\\ \text{=\$800,000×5\%×1year}\\ \text{=\$40,000}\end{array}$

Calculate interest expense for December 31, 2017 (2^nd year).

$\begin{array}{c}\text{Interest expense = }\left\{\begin{array}{l}\text{Beginning balance on December 31, 2016 }\times \\ \text{Interest rate }\times \text{ Time period}\end{array}\right\}\\ \text{=}\left(\text{\$800,000–\$80,000}\right)\text{ × 5\% ×1 year}\\ \text{=\$36,000}\end{array}$

Conclusion

Hence, options (b), (c), and (d) are incorrect and option (a) is the correct answer.