Accounting for a long-term note payable

On January 1, 2018, Lakeman-Fay signed a \(1,500,000, 15-year, 7% note. The loan

required Lakeman-Fay to make annual payments on December 31 of \)100,000

principal plus interest.

Requirements

1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first note payment on December 31, 2018.

Short Answer

Expert verified
  1. The cash is debited with $1,500,000 and notes payable credited with $1,500,000.
  2. The interest expenses and principal payment debited with $105,000 and $100,000.The cash account is credited with $205,000.

Step by step solution

01

Issuance of note payable

Date

Particulars

Debit

Credit

January 1, 2018

Cash

$1,500,000

7% Notes Payable

$1,500,000

(To record the issue of notes)

02

Journal entry for interest payment:

Date

Particulars

Debit

Credit

December 31, 2018

Interest expenses

$105,000

Principal payment

$100,000

Cash

$205,000

(To record the first payment of note)

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Most popular questions from this chapter

When a bond is issued, what is its present value?

Preparing the liabilities section of the balance sheet

Luxury Suites Hotels includes the following selected accounts in its general ledger at

December 31, 2018:

Notes Payable (long-term) \( 200,000 Accounts Payable \) 33,000

Bonds Payable (due 2022) 450,000 Discount on Bonds Payable 13,500

Interest Payable (due next year) 1,000 Salaries Payable 2,600

Estimated Warranty Payable 1,300 Sales Tax Payable 400

Prepare the liabilities section of Luxury Suites’s balance sheet at December 31, 2018.

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable

at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Weaver Corporation includes the following selected accounts in its general ledger on December 31, 2018:

Notes Payable (long-term) \( 75,000 Interest Payable (due next year) \) 720

Bonds Payable (long-term) 195,000 Sales Tax Payable 480

Accounts Payable 20,400 Premium on Bonds Payable 5,850

Salaries Payable 1,680 Estimated Warranty Payable 1,080

Prepare the liabilities section of Weaver Corporation’s balance sheet at December 31, 2018.

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