On January 1, 2015, Bratios Company purchased equipment and signed a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. On January 1, 2016, the journal entry to record the first installment payment will include a:

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The first installment payment will be allocated between reducing the principal of the mortgage and the interest expense. The interest on the mortgage for the first year will be $12,000 ($80,000 x 15%). Therefore, the journal entry will include a debit to Interest Expense for $12,000 and a credit to Cash for $21,139. There is no debit to Mortgage Payable or credit to Mortgage Payable in this entry as the principal reduction will be recorded separately.

On January 1, 2015, Bratios Company Purchased Equipment and Signed