Question

West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. The entry made by Drake Builders Company on January 1 to record the proceeds and issuance of the note is

a. Interest Expense... 6,000 Cash ,000 Notes Payable ,000
b. Cash ,000 Notes Payable ,000
c. Cash ,000 Interest Expense... 12,000 Notes Payable ,000
d. Cash ,000 Interest Expense... 12,000 Notes Payable ,000

Answer 1

The answer is b.Cash ,000 Notes Payable ,000

Step-by-step explanation:

The exact entry Drake Builders Company has to record in its accounting book for the proceeds received from the issuance of the note is:

1st January

Dr Cash 400,000

Cr Note Payable 400,000

As at the time the note is issued, no interest expenses has been incurred, all the answer with Interest expenses can be eliminated.

In fact, interest expenses is only incurred and accrued during the lifetime of the note, based on the number of days the note is hold; that is, from the day the fund is lend out to Drake Builders Company; not on the day of issuance.