Accounting Midterm Exam ACG-2011: Question 82

A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

	Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
	Debit Notes Payable $11,250; credit Cash $11,250.
	Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
	Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
	Debit Notes Payable $32,136; credit Cash $32,136.

Interest expense = $125,000 x 9% = $11,250
Principal reduction = $32,136 - $11,250 = $20,886