a. Journalize the entries to record the following:
1. Issued the installment note for cash on the first day of the fiscal year.
2. Paid the first annual payment on the note.
b. Explain how the notes payable would be reported on the balance sheet at the end of the first year.
Answer:
a. 1. Cash 50,000
Notes Payable 50,000
2.
Interest Expense* 2,500
Notes Payable 7,351
Cash
* $50,000 × 0.05
b. Notes payable are reported as liabilities on the balance sheet. The portion of the note payable that is due within one year is reported as a current liability. The remaining portion of the note payable that is not due within one year is reported as a long-term liability. For this company, the current and noncurrent portions of the note payable would be reported as follows:
Current liabilities:
Notes payable*……………………………………………………………………… $ 7,719
* The principal repayment portion of the next installment payment. See computation below.
Noncurrent liabilities:
Notes payable**…………………………………………………………………… $34,930
** Original note payable…………………………………………………………… $50,000
Less principal repayment from year 1……………………………………… 7,351
Note payable balance at the end of year 1………………………………… $42,649
Annual payment on note……………………………………………………… $ 9,851
Second year interest payment ($42,649 × 0.05)…………………………… 2,132
Principal repayment portion of next installment………………………… $ 7,719
Note payable balance at the end of year 1………………………………… $42,649
Current portion of note payable (due within one year)………………… 7,719
Noncurrent portion of note payable………………………………………… $34,930