The entry to record the issuance of a note for cash was recorded with a debit to Cash and a credit to Notes Receivable.The effect of recording this entry causes:
A) assets to be understated.
B) liabilities to be overstated .
C) stockholders' equity to be understated.
D) stockholders' equity to be overstated.

Question

Quizplus · Accepted Answer

The issuance of a note for cash results in an increase in both assets (Notes Receivable) and liabilities (the obligation to repay the note). However, the entry recorded debited Cash, which means that the company received cash and recognized an increase in its assets. Since the credit was made to Notes Receivable, this account increased and correctly reflects the additional liability of the note. Therefore, this entry correctly reflects the transaction and does not cause any overstatement or understatement in stockholders' equity. However, if the company had mistakenly debited Notes Receivable instead of Cash, then stockholders' equity would have been overstated.

The Entry to Record the Issuance of a Note for Cash