On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% instal
ID: 2454901 • Letter: O
Question
On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:
1. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
2. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
3. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Gash $17,000.
4. Debit Notes Payable $14,238; credit Gash $14,238.
5. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Gash $14,238
Explanation / Answer
Entry 1 is correct.
Dec 31 Note Payable a/c Dr $7238
Interest expenses a/c Dr $7000
To Cash $14328
Being the installment paid in cash
Explaination of the entry is below:
Note payable= $100000
Time=10 Years
Interest rate=7%
EMI= $14238
EMI contains an interest component as well as a principal component. The interest component is always 10% of the balance — because the interest rate is 10%. The remaining amount is the principal repayment.
So in the first year interest would be calculated on $100000 @ 7%= $7000