Question

 

Question: Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing $80,000 by issuing a five-year, 8% note

payable. The note requires annual principal payments of $16,000 plus

interest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions’ total liabilities on December 31, 2019?

Answer 1

 

Step 1: Definition of bonds

The bond is a type of long-term liability that the company issues to fulfill cash needs.

Step 2: Journal entries and the payment of interest

Date	Particulars	Debit	Credit
October 1, 2018	Cash	$80,000
	8% Bonds Payable		$80,000
	(Being issue entry of the bonds)
December 31, 2018	Interest Expense	$1,600
	Interest Payable		$1,600
	(To record accrued interest)
October 1, 2019	Interest Expense	$4,800
	Interest Payable	$1,600
	8% Notes Payable	$16,000
	Cash		$22,400
	(Being entry of the first installment with interest)
December 31, 2019	Interest Expense	$1,280
	Interest Payable		$1,280
	(To record accrued interest)

 

Step 3: Balance sheet

Caleb Video Productions
Balance Sheet
As of December 31, 2019
Current Liabilities
Interest Payable	$1,280
Non-Current Liabilities
8% Notes Payable	$64,000
Total Liabilities		$65,280

 

The total liabilities of the company are $65,280