A firm purchased equipment for $16,000 on credit and issued a 120-day note bearing interest at 9 percent as evidence of the debt. The journal entry to record this transaction is
A)debit Equipment for $16,000 and credit Accounts Payable for $16,000.
B)debit Equipment for $16,480 and credit Notes Payable for $16,480.
C)debit Equipment for $16,000, and credit Notes Payable for $16,000.
D)Equipment for $16,000, debit Interest Expense for $1,440, and credit Notes Payable for
$17,440.

Question

Quizplus · Accepted Answer

The firm purchased equipment on credit, meaning there is an accounts payable to be recorded. The issuance of a note payable means that there will be interest charged on the debt, but this is not recorded at the time of purchase. Therefore, the journal entry should be a debit to equipment, representing the asset acquired, and a credit to notes payable, representing the obligation to pay in the future. The amount of the note payable is equal to the cost of the equipment ($16,000) and does not include any interest charges. Therefore, the correct journal entry is to debit Equipment for $16,000 and credit Notes Payable for $16,000.

A Firm Purchased Equipment for $16,000 on Credit and Issued