Question

Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% notepayable. The note requires annual principal payments of \)16,000 plusinterest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions’ totalliabilities on December 31, 2019?

Short answer

• The cash account is debited with $80,000, and the payable bond account is credited with $80,000.
• Interest expenses debited by $1,600 and interest payable credited by $1,600.
• Interest expenses, interest payable and notes payable are debited by $1,600, $4,800 and $16,000 respectively. The cash credited by $22,400.
• Interest expenses debited by $1,280 and interest payable credited by $1,280.

Step-by-step solution

Journal entries and the payment of interest

Date	Particulars	Debit	Credit
October 1, 2018	Cash	$80,000
	8% Bonds Payable		$80,000
	(Being issue entry of the bonds)
December 31, 2018	Interest Expense	$1,600
	Interest Payable		$1,600
	(To record accrued interest)
October 1, 2019	Interest Expense	$4,800
	Interest Payable	$1,600
	8% Notes Payable	$16,000
	Cash		$22,400
	(Being entry of the first instalment with interest)
December 31, 2019	Interest Expense	$1,280
	Interest Payable		$1,280
	(To record accrued interest)

Working Notes:

Calculation of interest expenses on December 31, 2018:

$\begin{array}{c}\mathrm{Interest}\mathrm{Expense}=\mathrm{Notes}\mathrm{Payable}\times \mathrm{Interest}\mathrm{Rate}\times \mathrm{Period}\\ =\mathrm{\$}80,000\times 8\mathrm{\%}\times \frac{3}{12}\\ =\mathrm{\$}1,600\end{array}$

Calculation of interest expenses on October 31, 2019:

$\begin{array}{c}\mathrm{Interest}\mathrm{Expense}=\mathrm{Notes}\mathrm{Payable}\times \mathrm{Interest}\mathrm{Rate}\times \mathrm{Period}\\ =\mathrm{\$}80,000\times 8\mathrm{\%}\times \frac{9}{12}\\ =\mathrm{\$}4,800\end{array}$

Calculation of interest expenses on October 31, 2019:

$\begin{array}{c}\mathrm{Interest}\mathrm{Expense}=\mathrm{Remaining}\mathrm{Notes}\mathrm{Payable}\times \mathrm{Interest}\mathrm{Rate}\times \mathrm{Period}\\ =\left(\mathrm{\$}80,000-\mathrm{\$}16,000\right)\times 8\mathrm{\%}\times \frac{3}{12}\\ =\mathrm{\$}1,280\end{array}$