Question

On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, First Rate Bank should debit "notes receivable" for:

a. $300,000
b. $288,000
c. $312,000
d. $150,000
e. $600,000

Answer 1

First Rate Bank would debit "notes receivable" for the full principal amount of the loan provided on the issuance date, which is $300,000.

Step-by-step explanation:

When First Rate Bank lends $300,000 to Smite Corp., the bank records this loan by making an entry on its balance sheet. This loan is considered an asset because it represents a promise by Smite Corp. to repay the borrowed funds plus interest. The interest to be paid semi-annually on this note is $12,000, but this fact does not change the principal amount of the note. On the issuance date of the note, the appropriate entry for the bank would be to debit "notes receivable" for the amount of money lent, which is the principal amount of the loan.

Therefore, the correct debit entry for First Rate Bank's "notes receivable" on January 1, 20X1, would be for the amount of the loan provided, which is $300,000. So, the correct option is (a) $300,000.