Question

Consider the following note payable transactions of Creative Video Productions. 2017 Aug. 1 Purchased equipment costing $16,000 by issuing a one-year, 9% note payable. Dec. 31 Accrued interest on the note payable. 2018 Aug. 1 Paid the note payable plus interest at maturity. Journalize the transactions for the company.

Short answer

Answer

• Equipment cost is debited by $16,000 and notes payable credited by $16,000.

• Interest expenses debited by $600 and interest payable are credited by $600.

• Note payable, interest expenses payable and interest expenses are debited by $16,000, $600 and $840 respectively. The cash is credited by $17,440.

Step-by-step solution

Journal entries

Date	Accounts and explanation	Debit	Credit
Aug 1, 2017	Equipment cost	$16,000
	Note payable		$16,000
	(To record equipment in exchange of notes payable)
Dec. 31	Interest expenses	$600
	Interest payable		$600
	(To record accrued interest)
Aug 1, 2018	Note payable	$16,000
	Interest expense payable	$600
	Interest expenses	$840
	Cash		$17,440
	(To record note paid and interest at maturity)

Workings notes:

Calculation of interest expenses at December 31:

$$\begin{gathered} \mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{E}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathit{s}\mathbf{=}\mathit{N}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{}\mathit{P}\mathit{a}\mathit{y}\mathit{b}\mathit{l}\mathit{e}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{R}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\mathit{P}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{9}\mathbf{\%}\frac{\mathbf{5}}{\mathbf{12}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{600} \end{gathered}$$

Calculation of interest expenses at August 31:

$$\begin{gathered} \mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{E}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathit{s}\mathbf{=}\mathit{N}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{}\mathit{P}\mathit{a}\mathit{y}\mathit{b}\mathit{l}\mathit{e}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{R}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\mathit{P}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{9}\mathbf{\%}\frac{\mathbf{7}}{\mathbf{12}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{840} \end{gathered}$$