On January 1, Year 1, Merrill Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Merrill to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 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 Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
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 entry involves debiting Interest Expense for the interest portion of the payment ($7,000, which is 7% of $100,000) and debiting Notes Payable for the principal portion ($7,238, which is the total payment of $14,238 minus the interest expense of $7,000), then crediting Cash for the total payment amount of $14,238.

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