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 payment on the note on December 31,Year 2 is:
A)Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B)Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C)Debit Interest Expense $6,493; debit Notes Payable $7,745; credit Cash $14,238.
D)Debit Notes Payable $14,238; credit Cash $14,238.
E)Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

Question

Quizplus · Accepted Answer

The correct answer involves calculating the interest expense for the year, which is based on the outstanding balance of the note payable. Since the note is an installment note, part of each payment goes towards paying off the principal (the amount borrowed), and part goes towards interest. Initially, the interest for the first year would be based on the full $100,000, but in subsequent years, the interest expense decreases as the principal is paid down. The payment of $14,238 is split between reducing the principal (notes payable) and covering the interest expense. The exact amounts for interest and principal repayment in Year 2 can be calculated based on an amortization schedule for the loan, which would show decreasing interest expense and increasing principal repayment over the 10 years. Option C correctly reflects a typical scenario where part of the payment goes towards interest ($6,493) and the larger portion towards reducing the principal ($7,745).

On January 1,Year 1,Stratton Company Borrowed $100,000 on a 10-Year,7