On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the payment of the first annual amount due on the note would include a
A) debit to Cash for $11,942
B) credit to Interest Payable for $11,550
C) debit to Notes Payable for $11,942
D) debit to Interest Expense for $23,492

Question

Quizplus · Accepted Answer

The correct journal entry for the payment of the first annual amount due on the note includes a debit to Notes Payable for $11,942, reflecting the reduction in the principal amount of the note payable. The payment also includes interest, but the correct treatment for the interest portion is not to debit Interest Expense for the total payment amount. Interest Expense should be debited for the actual interest portion of the payment, which is $11,550, not represented in the given options.

On January 1, Gemstone Company Obtained a $165,000, 10-Year, 7