On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the journal entry to record the first annual payment?
A)Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B)Debit Interest Expense $37,258; credit Cash $37,258.
C)Debit Interest Expense $20,000; credit Cash $20,000.
D)Debit Interest Expense $20,000; debit Interest Payable $17,258; credit Cash $37,258.
E)Debit Interest Expense $20,000; debit Notes Payable $17,258; credit Cash $37,258.

Question

Quizplus · Accepted Answer

The first annual payment includes both interest expense and principal repayment. The interest expense for the first year is calculated as 8% of $250,000, which is $20,000. The remainder of the payment ($37,258 - $20,000 = $17,258) reduces the principal amount of the note payable. Therefore, the journal entry includes debiting Interest Expense for the interest portion and Notes Payable for the principal portion, with a credit to Cash for the total payment amount.

On July 1,Shady Creek Resort Borrowed $250,000 Cash by Signing