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On January 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring annual equal payments each December 31 of $37,258. What is the journal entry to record the second annual payment?On January 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring annual equal payments each December 31 of $37,258. What is the journal entry to record the second annual payment?

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Answer:

December 31, year 2, second annual payment

  • Dr Interest Expense account 18,619
  • Dr Notes Payable Account 18,639
  • Cr Cash account 37,258

Explanation:

The first annual payment included a $20,000 interest (= $250,000 x 8%), therefore the principal was only reduced by $17,258 (= $37,258 - $20,000). Remaining principal = $250,000 - $17,258 = $232,742  

The second annual payment included a $18,619 interest (= $232,742 x 8%), therefore the principal was reduced by $18,639.

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