Question

On the first day of the fiscal year, Shiller Company borrowed $85,000 by giving a seven–year, 7% installment note to Soros Bank. The note requires annual payments of $15,772, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $5,950 and principal repayment of $9,822.

Journalize the entries to record the following:

a1. Issued the installment note for cash on the first day of the fiscal year.

a2. Paid the first annual payment on the note. For a compound transaction, if an amount box does not require an entry, leave it blank.

 b. How would the nones payable be reported on the balance sheet at the end of the fiscal year?

Answer 1

Solution:

A1 - Journal entry at the time of issue of installment note for cash:

Bank A/c                              Dr           $85,000

   To Notes Payable Cr                            $85,000

A2 – Journal entry at the time of first annual payment:

Notes Payable A/c           Dr           $9,822

Interest Expense A/c Dr           $5,950

     To Bank A/c                   Cr                            $15,772

B – Notes payable to be reported in balance sheet at the end of fiscal year:

Notes payable end balance = $85,000 - $9,822 = $75,178

Interest for 2^nd year = $75,178 * 7% = $5,262

Installment amount for 2^nd year = $15,772

Principal repayment for 2^nd year = $15,772 - $5,262 = $10,510

Therefore out of $75,178 notes payable, $10,510 is payable within 1 year. There $10510 will be shown in balance sheet as current liabilities and remaining $64,668 will be shown in balance sheet as long term liability.