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Camp Elim obtains a $125,000, 6%, five-year installment note for a new camp bus on January 1, 2021. The note requires monthly installment payments of $2,416.60 What journal entry will be recorded for the first month’s payment on January 31, 2021?

Multiple Choice

Debit interest expense $1,500; debit notes payable $916.60; credit cash $2,416.60

Debit notes payable $625; debit interest expense $1,791.60; credit cash $2,416.60

Debit interest expense $625; debit notes payable $1,791.60; credit cash $2,416.60

Debit notes payable $1,500; debit interest expense $916.60; credit cash $2,416.60

Respuesta :

Answer:

Option (B) is correct.

Explanation:

The Journal entry is as follows:

Interest expense A/c Dr. $625

Note payable A/c       Dr. $1791.60

To cash                                            $2,416.60

(To record the first month’s payment on January 31, 2021)

Working notes:

Monthly interest expense:

= (Note payable × Interest rate per annum) ÷ 12 months

= ($125,000 × 6%) ÷ 12 months

= $625

Note payable = $2,416.60 - $625

                       = $1,791.60