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Answer :
Final answer:
The correct journal entry to record the first month's payment would be option a: Debit interest Expense $68: debit notes payable $1,292; credit cash $1,360
Explanation:
The correct journal entry to record the first month's payment would be option a. Debit interest Expense $68: debit notes payable $1,292; credit cash $1,360.
When recording the monthly payment, we need to split it into two parts: the portion that goes towards interest expense and the portion that reduces the notes payable. In this case, the interest expense would be 5% of the outstanding balance of the notes payable, which is $31,000. So the interest expense for the first month would be $1,550. Since the required monthly payment is $1,360, the remaining $190 would be used to reduce the notes payable.
Therefore, the journal entry would be: Debit interest Expense $68 (portion of payment for interest expense), debit notes payable $1,292 (portion of payment reducing the notes payable), and credit cash $1,360 (payment made).
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The correct journal entry to record the first month's payment is a. Debit interest expense $68: debit notes payable $1,292; credit cash $1,360.
The first month's payment consists of two components: interest expense and principal reduction. The interest expense for the first month is calculated as $31,000 * 5% * 1/12 = $68. The principal reduction for the first month is $1,360 - $68 = $1,292.
The journal entry to record the first month's payment is as follows:
Dr. Interest Expense 68
Dr. Notes Payable 1,292
Cr. Cash 1,360
The interest expense is debited because it is an expense that is incurred during the month. The notes payable is debited because the principal amount of the note is being reduced. The cash is credited because this is the amount of cash that is paid out.
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