On January 1, 2011, Gemstone Company obtained a $280,000, 10-year, 11% installment note from Guarantee Bank. The note requires annual payments of $47,544, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $30,800 and principal repayment of $16,744. The journal entry to record the issuance of the installment note for cash on January 1, 2011 would include:
A) a debit to Interest Expense of $30,800
B) a credit to Interest Payable of $195,440
C) a credit to Notes Payable of $280,000
D) a debit to Notes Payable of $475,440

Question

Quizplus · Accepted Answer

The journal entry to record the issuance of the installment note for cash on January 1, 2011 would be:

Debit: Cash for $263,256 ($47,544 - $30,800 - $16,744)
Credit: Notes Payable for $280,000

Option A is incorrect because interest expense would not be recorded until the end of the first fiscal year when the first payment is made.

Option B is incorrect because interest payable is not needed to be recorded at the time of the issuance of the note.

Option D is incorrect because it does not reflect the correct amounts that are exchanged at the time of issuance.

On January 1, 2011, Gemstone Company Obtained a $280,000, 10-Year