Task: On January 1, 2005, Smith Graphics, Inc., a product-labeling and graphics firm, borrowed $300,000 cash from First BancCorp and issued a five-year, 8% promissory note. The note requires annual interest payments each December 31.
A. Prepare Skill Graphic's journal entries to record (1) the issuance of the note and (2) the December 31 interest payment.
B. How does the note affect Skill Graphic's financial statements? What type of disclosure is required?
C. Why is it advantageous for the company to issue long-term notes versus issuing shares of stock?