Question

Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note?

Answer 1

Bigelow Corp. records the receipt of the $10,000 three-year note by debiting Notes Receivable and crediting Cash, both by the amount of $10,000, as the note's interest rate matches the market rate.

Step-by-step explanation:

When Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a three-year note at 10% interest, and the market rate is the same, Bigelow would record the receipt of the note at its face value. The accounting entry would be a debit to Notes Receivable for $10,000 and a credit to Cash for $10,000. This reflects the initial recognition of the note on Bigelow Corp.'s balance sheet as an asset, given it is expected to earn interest income over the life of the note.