Grayson Bank agrees to lend the Trust Company $120,000 on January 1. Trust Company signs a $120,000, 8%, 9-month note. The entry made by Trust Company on January 1 to record the proceeds and issuance of the note is:
A) Interest Expense 9,600 Cash 110,400
Notes Payable 120,000
B) Cash 120,000 Notes Payable 120,000
C) Cash 129,600 Interest Expense 9,600
Notes Payable 120,000
D) Notes Payable 120,000 Interest Payable 7,200
Cash 120,000
Interest Expense 7,200

Question

Quizplus · Accepted Answer

The entry to record the issuance of the note is a simple debit to Cash for the amount received and a credit to Notes Payable for the same amount, since the note is not discounted (no fees or interest are subtracted from the proceeds at issuance). Therefore, the correct answer is B, which corresponds to this journal entry. The other choices include interest expenses or interest payable, which are not relevant at the issuance of the note but later in its life. Choice C includes an incorrect total amount of cash, which is $120,000, not $129,600. Choice D introduces interest payable and expenses, which are not needed yet.

Grayson Bank Agrees to Lend the Trust Company $120,000 on January