Caddell Corporation borrows $100,000 from a bank on August 1, Year 1, by signing an 8 percent, six-month note for the amount borrowed plus accrued interest due six months later on February 1, Year 2. Which of the following is recorded on August 1, Year 1?Multiple Choice$100,000 credit to Cash$100,000 credit to Notes Payable$104,000 debit to Cash$104,000 debit to Notes Payable
Question
Caddell Corporation borrows 100,000 credit to Cash104,000 debit to Cash$104,000 debit to Notes Payable
Solution
The correct answer is "100,000 debit to Notes Payable". Here's the step by step explanation:
Step 1: On August 1, Year 1, when the loan is taken, the company receives cash from the bank. This increases the company's cash account. In accounting, an increase in an asset account (like cash) is recorded as a debit. So, we debit Cash for $100,000.
Step 2: In return for the cash, the company gives the bank a note promising to pay back the loan. This is a liability for the company. In accounting, an increase in a liability account is recorded as a credit. So, we credit Notes Payable for $100,000.
The interest is not recorded on August 1, Year 1 because it has not been incurred yet. The interest is recorded as it accrues over the six-month period.
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