Question

Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1. Givens Brick Company signs a $600,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is a.

A. Interest Expense...... 36,000
Cash.... 564,000
Notes Payable 600,000
B. Cash.... 600,000
Notes Payable 600,000
C. Cash...... 600,000
Interest Expense..... 36,000
Notes Payable 636,000
D. Cash........ 600,000
Interest Expense..... 36,000
Notes Payable 600,000
Interest Payable. 36,000

Answer 1

The correct entry to record a $600,000 loan received by Givens Brick Company is to debit Cash for $600,000 and credit Notes Payable for the same amount, without accounting for interest expense or payable at the outset.

Step-by-step explanation:

The question involves recording a loan transaction in the books of the borrower, Givens Brick Company, which has secured a loan from Admire County Bank. The correct journal entry to record the receipt of the $600,000 loan proceeds on January 1 would be:

Option B:

• Cash........... 600,000
• Notes Payable.... 600,000

This entry debits Cash because the company receives money, thus increasing its assets. It credits Notes Payable, a liability account, representing the company's obligation to repay the borrowed amount. Since the interest has not yet accrued as the loan begins on January 1, there is no need to record interest expense or interest payable at this point. Givens Brick Company will recognize interest expense and interest payable over the term of the loan as time passes, not at the moment of receiving the loan. Option B correctly records the initial loan transaction.