Bison Corp. issues a 5 year 8%, $60,000 note payable on March 1. The terms of the note include monthly blended principal and interest payments of $1,217. The entry to record the second instalment payment will show a:
A) debit to Interest Expense for $400.
B) credit to Interest Expense for $395.
C) debit to Notes Payable of $822.
D) debit to Cash for $1,217.

Question

Quizplus · Accepted Answer

The second installment payment will include a debit to Notes Payable for the principal portion of the payment. The interest portion of the first payment was $400 (8% annual interest on $60,000, divided by 12 months), so the principal portion was $817 ($1,217 - $400). For the second payment, the interest will be calculated on the reduced principal balance, resulting in a slightly lower interest expense and a higher principal reduction. Therefore, the debit to Notes Payable will be approximately $822.