Madison Bank lends Neenah Paper Company $120,000 on January 1,2017.Neenah signs a $120,000,10%,6-month note.The journal entry made by Neenah on January 1,2017 will debit:

Question

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When Neenah borrows $120,000 from Madison Bank and signs a 6-month note with 10% interest rate, the company receives $120,000 in cash, which is debited. The corresponding credit goes to the Notes Payable account, as the company now owes this amount to the bank. The interest expense of $12,000 (=$120,000 × 10% × 6/12) is recognized at the end of the note's term, so it is not recorded on January 1, 2017. Therefore, the correct entry is to debit Cash for $120,000 and credit Notes Payable for $120,000. Options A and B are incorrect because they incorrectly adjust for the interest expense that has not yet accrued. Option D is incorrect because it records only the interest expense but not the liability related to the principal amount of the note.

Madison Bank Lends Neenah Paper Company $120,000 on January 1,2017