Prepare the
Explanation of Solution
Notes payable: Notes Payable is a written promise to pay a certain amount on a future date, with the certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.
Prepare the journal entry to record issuance of notes as follows:
Date | Account titles and Explanation | Post ref. | Debit | Credit |
January 1, 2019 | Cash | $100,000 | ||
Notes payable | $100,000 | |||
(To record issuance of notes payable) |
Table (1)
To record issuance of notes payable:
- 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 $100,000.
Journalize the first note payment on December 31, 2019, as follows:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2019 | 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)
To record the first payment of bonds payable with due interest:
- Notes Payable is a liability and it is decreased. Therefore, it is debited 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 payment of interest expense decreases cash, so it is credited for $29,523.
Working Notes:
Interest expense for one year is computed as below:
Calculate the portion of notes payable paid.
Interest expense = $7,000
Four equal payments = $29,523
Journalize the second note payment on December 31, 2020, as follows:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2020 | 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)
To record the second payment of bonds payable with due interest:
- Notes Payable is a liability and it is decreased. Therefore, it is debited 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 payment of interest expense decreases cash, so it is credited for $29,523.
Working Notes:
Interest expense for second year is computed as below:
Calculate the portion of notes payable paid.
Interest expense = $5,423
Four equal payments = $29,523
Journalize the third note payment on December 31, 2021, as follows:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2021 | 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)
To record the third payment of bonds payable with due interest:
- Notes Payable is a liability and it is decreased. Therefore, it is debited 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 payment of interest expense decreases cash, so it is credited for $29,523.
Working Notes:
Interest expense for third year is computed as below:
Calculate the portion of notes payable paid.
Interest expense = $3,736
Four equal payments = $29,523
Journalize the fourth note payment on December 31, 2022, as follows:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2022 | 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)
To record the fourth payment of bonds payable with due interest:
- Notes Payable is a liability and it is decreased. Therefore, it is debited 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 payment of interest expense decreases cash, so it is credited for $29,523.
Working Notes:
Interest expense for fourth year is computed as below:
Calculate the portion of notes payable paid.
Interest expense = $1,933
Four equal payments = $29,523
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Chapter 14 Solutions
Principles of Financial Accounting.
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