Question

Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, 9-month note. The entry made by Guarantee Company on January 1 to record the proceeds and issuance of the note is A.Interest Expense 12,000 Cash 138,000 Notes Payable 150,000 B. Cash 150,000 Notes Payable 150,000 C. Cash 162,000 Interest Expense 12,000 Notes Payable 150,000 D. Notes Payable 120,000 Interest Payable 7,200 Cash 120,000 Interest Expense 7,200

Answer 1

Answer:

B. Cash 150,000 Notes Payable 150,000

Explanation:

Sr                           Account                      Dr                            Cr

Jan 1          Cash                               $ 120,000

                Notes  Payable                                                  $ 120,000

This entry would be made in the books of Guarantee Company. As the interest has not yet accrued so no entry regarding the interest expense or interest payable would be made.

Choice A is not correct because it accounts for interest expense which has not yet accrued from the cash received.

Choice C is also incorrect because the actual amount of cash received is $ 150,000.

Choice D is also incorrect because Cash is debited with an increase and liabilities increase with a credit and this is reverse.

Best Choice is B