Question

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that

requires ABC to pay both principal and interest on October 31, 2019. The journal entry on
November 1, 2018 would include which of the following?


A. Debit to Interest Expense $6,000
B. Debit to Cash $100,000
C. Credit to Note Payable $106,000
D. Credit to Note Payable $100,000

Answer 1

A. Debit to Interest Expense $6,000

B. Debit to Cash $100,000

C. Credit to Note Payable $106,000

Step-by-step explanation:

On collection of the loan, there is an increase in cash (asset), however there is also an increase in liability. The entries required will include the loan payable which is made of the interest and principal payable.

The interest payable

= 6% * $100,000

= $6,000

The entries so required on November 1, 2018

Debit Cash account $100,000

Debit Interest expense $6,000

Credit Loan payable $106,000

Being entries to record loan payable.

Answer 2

The correct thing to do is to debit cash $100,000 and credit notes payable $100,000 B&D

Step-by-step explanation:

One needs to know that the question is talking the entries required on the date of transaction, the date loan was taken out.

The interest has not been incurred,it would be an accounting blunder to recognize interest on a loan that has not been incurred,

The prudence and accrual concepts are being violated by recognizing interest when it has not been incurred.

The way out would be to ask a simple question,what happened on November,1 2018?Cash of $100,000 was received,no more.

Which implies that cash increased , debit to cash and a credit to notes payable as liability has also increased.