Final answer:
The transactions detail C.S. Cullumber Company taking out notes payable, which are loans with specified repayment terms. Adjusting entries are made for accrued interest and payments are made on the due dates. Singleton Bank's example illustrates the asset creation of a loan and the impact on bank reserves and lending capacity via fractional-reserve banking.
Step-by-step explanation:
Understanding Notes Payable and Bank Transactions:
The transactions described involve a company taking out notes payable, which are formal promissory notes (in essence, loans), that specify the terms under which the company promises to repay borrowed money. In our example, C.S. Cullumber Company has entered into two notes payable: one with First National Bank and another with Lyon County State Bank. Each note has a different interest rate and maturity period. The interest on these notes needs to be calculated for the time periods the money is borrowed until the end of the fiscal year (for adjusting entries) and until the repayment date. The company prepares adjusting entries on December 31, 2022, to report the accrued interest expense up to that date for financial statements.
On February 1, 2023, C.S. Cullumber Company pays back the principal and interest on the note payable to Lyon County State Bank. Similarly, on April 1, 2023, they pay back the First National Bank.
The example provided in the reference regarding Singleton Bank and Hank's Auto Supply details the transaction from a bank's perspective, illustrating how the loan becomes an asset for Singleton Bank, and how a deposit at First National affects its reserves and the proportion that the bank is required to maintain as reserves by regulation. A portion of the deposits, minus the required reserves, is available for the bank to make additional loans, demonstrating the principle of fractional-reserve banking.