Q5SE - Horngren'S Financial And Managerial Accounting

Question

On January 1, Irving Company purchased equipment of \(280,000 with a long-term note payable. The debt is payable in annual installments of \)56,000 due on December 31 of each year. At the date of purchase, how will Irving Company report the note payable?

Step-by-Step Solution

Answer

Answer

 

At the time of purchase, $56,000 will be considered as current liability and $224,000 will be considered as long term liability in its balance sheet.

Step-by-step solution

Step 1: Accounting treatment to report the note payable”

Generally, notes payable are long-term but the first installment is due within the 12 months, so first installment should be considered as current liability and rest of the amount be considered as long-term liability.

Step 2: Calculation for long-term liability

$$\begin{gathered} \mathrm{Long} \mathrm{term} = \mathrm{Purchase} - \mathrm{Installments} \\ =\$280,000 - \$56,000 \\ = \$ 224,000 \end{gathered}$$