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19 May, 13:25

On the first day of the fiscal year, Shiller Company borrowed $85,000 by giving a seven-year, 7% installment note to Soros Bank. The note requires annual payments of $15,772, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $5,950 and principal repayment of $9,822.

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  1. 19 May, 16:43
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    A₁ - Journal entry at the time of issue of installment note for cash:

    Bank A/c Dr $85,000

    To Notes Payable Cr $85,000

    A₂ - Journal entry at the time of first annual payment:

    Notes Payable A/c Dr $9,822

    Interest Expense A/c Dr $5,950

    To Bank A/c Cr $15,772

    Notes payable to be reported in balance sheet at the end of fiscal year:

    Notes payable end balance = $85,000 - $9,822 = $75,178

    Interest for 2nd year = $75,178 * 7% = $5,262

    Installment amount for 2nd year = $15,772

    Principal repayment for 2nd year = $15,772 - $5,262 = $10,510

    Therefore out of $75,178 notes payable, $10,510 is payable within 1 year.

    There $10510 will be shown in balance sheet as current liabilities and

    remaining $64,668 will be shown in balance sheet as long term liability.
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