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Answer:
Notes Payable is the credit agreement between two parties, in which one party borrows specific amount of money from the other party and promises to pay back the amount with interest on the specified date.
Company C borrows $30,000 on January 1, 2021 to purchase a truck. Interest rate is 6%. At the end of each month, payment due is $566.14. It is required to record the issue of note payable and first month interest payment.
Journal entry to record the issue of notes payable is given below
January 1, 2021:
Debit: Cash = $30,000
Credit: Notes payable =$30,000
Cash is debited because the amount is received by the company and what comes in is always debited. Notes payable is credited as it is a counter account.
Journal entry to record the monthly interest payment on January 31, 2021 is given below:
Debit: Interest expense ($30,000 x 5% x 1/12) = $125
Debit: Notes payable = 441.14
Credit: Cash = $566.14
Interest expense is debited because it is an expense for the company and any increase in expenses are always debited. Notes payable is debited as it represents the amount of amortization. Cash is credited because cash is paid by the company as what goes out is always credited.
Working note:
The Monthly interest expense has computed by multiplying the issue price ($30,000) with the interest rate (5%).
The balancing figure of Notes payable has computed as the difference between the interest expense and cash interest ($566.14 - $125) = $441.14 which represents the amount of amortization
Based on the information given the appropriate entries to record the issuance of the note payable for cash and the first monthly payment are:
Corvallis Carnivals Journal entries
January 1, 2021
Debit Equipment $30,000
Credit Notes payable $30,000
( To record issuance of the note payable)
January 30, 2021
Debit Notes payable
($566.14-$125)
Debit Interest expense $125
($30,000 × 5% × 1 / 12)
Credit Cash $566.14
(To record first monthly payment)
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