On January 1, Franklin Company purchased equipment of $ 260 comma 000 with a long-term note payable. The debt is payable in annual installments of $ 52 comma 000 due on December 31 of each year. At the date of purchase, how will Franklin Company report the note payable?

Question

Ryann Blake

Business

9 November, 19:15

On January 1, Franklin Company purchased equipment of $ 260 comma 000 with a long-term note payable. The debt is payable in annual installments of $ 52 comma 000 due on December 31 of each year. At the date of purchase, how will Franklin Company report the note payable?

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Answers (1)

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Ava Cobb · Answer 1

Jan 1:

Equipment A/C Dr. $260,000

To Note Payable A/c $260,000

(Being purchase of an equipment against note payable, being recorded)

Explanation:

Assets are real accounts. The principle which applies to real accounts being, "debit what comes in, credit what goes out". Debiting an asset increases the Assets account balance.

Liabilities are also real accounts and thus, same principle applies. Crediting a liability increases liabilities account balance.

In the given case an asset (equipment) is purchased against a note payable. This increases the assets balance and creates a liability for the same amount which increases liabilities balance.