Question

Exercise 1 alternative: On May 1, 2018 YumCheesecake purchased a pudding machine for $97,000 by signing a six-year, 15% promissory note to the seller. The note requires equal annual instalments of $25,631. Company is on a calendar year for accounting purposes. Record the journal entry on May 1, 2018:

(Hint: record the issue of notes payable)

What happens on December 31, 2018?

(Hint: record the accrual of interest at the end of year in an adjusting journal entry)

Company makes its first payment on May 1, 2019:

(Hint: the payment includes the principal and interest portion: the principal portion reduces the balance of notes payable account; the interest portion of cash payment should include the accrued interest at December 31, 2018 and more interest accrued since that date as of May 1, 2019)

What is the balance of Notes Payable after the payment on May 1, 2019?

Answer 1

Date	Account Titles and Explanation	Debit	Credit
May 1, 2018	Equipment	97000
	Notes payable		97000
	(To record issue of notes payable)
Dec 31, 2018	Interest expense	9700
	Interest payable ($97000 x 15% x 8/12)		9700
	(To record accrual of interest on note)
May 1, 2019	Notes payable	11081
	Interest payable	9700
	Interest expense ($97000 x 15% x 4/12)	4850
	Cash		25631
	(To record payment of first installment)

Balance of notes payable after the payment on May 1, 2019 = $97000 - $11081 = $85919