Question

A company purchased equipment on July 1, 2018 and signed a 8 year mortgage note for $150,000 at 5% interest. The note will be paid in equal installments beginning July 1, 2019. On July 1, 2019, the journal entry to record the first installment payment will include a

credit to cash of $$150,000

debit to interest expense of $7,500

credit to interest expense of $7,500

debit to interest expense of $3,750

Answer 1

Ans is

Debit to interest expense of $3,750

Interest expense for the first year will be = 150000*5%= $7500

However, books are closed on 31st December.

Therefore while we pay interest on July 1, 2019, it will include the interest of 2018 from July 1, 2018, to Dec 31, 2018 and interest of 2019 from Jan 1, 2019, to July 1, 2019.

Hence, the entry will be

Interest expense Dr $3750

Interest payable Dr $3,750

Note payable Dr

Cash Cr

Therefore, the option "debit to interest expense of $3,750" is correct.

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