B & B Farms records the loan received as a debit to Cash and a credit to Notes Payable. Upon repayment, they debit Notes Payable and Interest Expense, while crediting Cash for the total amount paid back, including interest.
The student is asking about the appropriate journal entries for a loan transaction for B & B Farms from Citizen's Bank. Here's how B & B Farms would record the transactions:
Journal Entry on June 1, 2014
- Debit Cash $500,000
- Credit Notes Payable $500,000
This entry reflects the cash received from the loan.
Journal Entry on November 30, 2014
- Debit Notes Payable $500,000
- Debit Interest Expense (calculate based on 6% per annum for 6 months)
- Credit Cash (sum of loan and interest)
The second entry shows the repayment of the loan principal and payment of the accrued interest on the due date.
When B & B Farms receives a loan, it increases the Cash account (asset) and creates a liability under Notes Payable. Upon repayment, the firm pays back the principal (reducing the liability) and recognizes the Interest Expense incurred over the loan period, paying out the accumulated amount from its cash.
In conclusion, B & B Farms records the loan as a debit to Cash and a credit to Notes Payable initially. Later, they record the repayment and interest as debits to Notes Payable and Interest Expense, and a credit to Cash.