A firm purchased equipment for $16,000 on credit and issued a 120-day note bearing interest at 9 percent as evidence of the debt. The journal entry to record this transaction is

Question

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The firm purchased equipment on credit, meaning there is an accounts payable to be recorded. The issuance of a note payable means that there will be interest charged on the debt, but this is not recorded at the time of purchase. Therefore, the journal entry should be a debit to equipment, representing the asset acquired, and a credit to notes payable, representing the obligation to pay in the future. The amount of the note payable is equal to the cost of the equipment ($16,000) and does not include any interest charges. Therefore, the correct journal entry is to debit Equipment for $16,000 and credit Notes Payable for $16,000.

A Firm Purchased Equipment for $16,000 on Credit and Issued