Question

On January 1, Luther Co. issued a $1,000,000, five-year, 8% installment note payable with payments of $250,456 principal plus interest due on January 1 of each year for the next five years.

Required:

1.	Prepare the adjusting journal entry at December 31 to accrue interest for the year. Refer to the Chart of Accounts for exact wording of account titles.
2.	Show the account(s) and amount(s) and where it(they) will appear on a multi-step income statement prepared on December 31.
3.	Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31. Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31. Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries. Partial Balance Sheet 1 Current Liabilities: 2 3 4 Long-Term Liabilities: 5

Answer 1

		N	A	B	C	D	E=A-D
		Year	Beginning Balance	Total Payment	Interest payment	Principal payment	Ending Balance
		1	$1,000,000	$250,456	$80,000	$170,456	$829,544
		2	$829,544	$250,456	$66,363	$184,093	$645,451
		3	$645,451	$250,456	$51,636	$198,820	$446,630
		4	$446,630	$250,456	$35,730	$214,726	$231,904
		5	$231,904	$250,456	$18,552	$231,904	$0
		C=Interest Payment	(Calculated using excel IPMT function with Rate=8%,Per=N, Nper=5, PV=-1000000
		D=Principal payment	(Calculated using excel PPMT function with Rate=8%,Per=N, Nper=5, PV=-1000001
	ADJUSTING JOURNAL ENTRY
	Date	Account Title	Debit	Credit
	.Dec 31 , Year 1	Interest expense	$80,000
		Interest payable		$80,000
	.Dec 31 , Year 2	Interest expense	$66,363
		Interest payable		$66,363
	.Dec 31 , Year 3	Interest expense	$51,636
		Interest payable		$51,636
	.Dec 31 , Year 4	Interest expense	$35,730
		Interest payable		$35,730
	.Dec 31 , Year 5	Interest expense	$18,552
		Interest payable		$18,552
2		MULTI-STEP ACCOUNT STATEMENT
		Sales
		Cost of goods sold
		Gross profit
		Operating expenses
		Profit before interest and taxes
		Interest expenses	$80,000
		Profit before taxes after interest
		Tax expenses
		Net Profit
	Partial Balance Sheet at end of December Year1
	1	Current Liabilities:
	2	Current portion of long term liabilities	$184,093
	3
	4	Long-Term Liabilities:
	5	Long term liabilities	$645,451