A corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?

A) Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B) Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C) Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D) Debit Notes Payable $32,136; credit Cash $32,136.
E) Debit Notes Payable $11,250; credit Cash $11,250.

The first payment is for the interest accrued on the outstanding principal balance of the note for the first year, which is 9% of $125,000 = $11,250. Therefore, the journal entry should include a debit to Interest Expense for $11,250. The remaining amount of the payment, $32,136 - $11,250 = $20,886, should be applied to reduce the principal balance of the note. Therefore, there should be a debit to Notes Payable for $20,886 and a credit to Cash for the full payment amount of $32,136. Thus, the correct journal entry is:

Debit Interest Expense $11,250
Debit Notes Payable $20,886
Credit Cash $32,136