Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

Which of the following is a true statement about when a promissory note is sold?

The buyer records a debit to Notes Receivable and a credit to Interest Revenue.

The seller records a debit to Interest Expense and a credit to Notes Receivable.

The seller records a debit to Cash and a credit to Notes Receivable.

The seller records a debit to Notes Payable and a credit to Cash.

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Verified step by step guidance

Step 1: Understand the concept of a promissory note. A promissory note is a financial instrument that represents a written promise by one party (the maker) to pay another party (the payee) a specified sum of money either on demand or at a future date.

Step 2: Analyze the transaction when a promissory note is sold. The seller of the promissory note receives cash in exchange for transferring the note to the buyer. This means the seller's Notes Receivable account is reduced, and the Cash account is increased.

Step 3: Determine the correct journal entry for the seller. When the promissory note is sold, the seller records a debit to the Cash account (to reflect the receipt of cash) and a credit to the Notes Receivable account (to remove the promissory note from their books).

Step 4: Review the incorrect options. For example, the seller does not record a debit to Interest Expense or Notes Payable because these accounts are unrelated to the sale of the promissory note. Similarly, the buyer does not record a credit to Interest Revenue at the time of purchase; they record Notes Receivable instead.

Step 5: Confirm the correct answer. Based on the analysis, the correct statement is: 'The seller records a debit to Cash and a credit to Notes Receivable.' This reflects the proper accounting treatment for the sale of a promissory note.