Borrowed $40,000 cash from the bank and signed a note payable agreeing to repay it in one year plus 10% interest.

Question

BlackTom AI · Accepted Answer

The scenario describes borrowing $40,000 cash from a bank and signing a note payable for that amount, plus interest of 10% annually. The interest for one year would be 0.10 × 40,000 = 4,000.

Option A: 'Dr. Note Payable 40,000      Cr. Cash 40,000'
This entry debits Note Payable and credits Cash, which would be appropriate if you were settling a note payable or creating a liability in reverse, but it does not reflect the actual borrowing transaction. You are not reducing a liability here; you are incurring one. Therefore this option is incorrect.

Option B: 'Dr. Note Payable 40,000      Dr. Interest Payable 4,000      Cr. Cash 40,000'
This entry debits Note Payable and Interest Payable and credits Cash. Debiting Note Payable would reduce or eliminate a liability, which is the opposite of what happens when you borrow. You should be increasing (crediting) a liability (Note Payable) with the cash receipt, not debiting it. The double-debit structure here is inconsistent with the event. This option is incorrect.

Option C: 'Dr. Cash 40,000      Cr. Note Payable 40,000      Cr. Interest Payable 4,000'
This entry correctly records the receipt of cash (debit Cash 40,000), and establishes the obligation to repay the principal (credit Note Payable 40,000) along with recognizing the interest that accrues (credit Interest Payable 4,000). In other words, you’ve increased assets (Cash) and increased liabilities (Note Payable and Interest Payable) by the appropriate amounts. This aligns with standard double-entry accounting for a signing of a loan with interest accrued at inception. This option is correct.

Option D: 'None of the above'
Given that Option C provides a correct journal entry for the transaction, this option is not accurate. The correct entry is represented by Option C, so selecting 'None of the above' would be incorrect.

Borrowed $40,000 cash from the bank and signed a note payable agreeing to repay it in one year plus 10% interest.

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