Question

Ontario Resources, a natural energy supplier, borrowed $80.8 million cash on November 1, 2021, to fund a geological survey. The loan was made by Quebec Banque under a short-term financing arrangement. Ontario Resources issued a 6-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year.

Prepare the journal entry for the issuance of the note by Ontario Resources.

Answer 1

Answer:

1 Nov 2021   Cash                              $80.8 million Dr

                           Notes Payable                     $80.8 million Cr

Explanation:

The note issued by Ontario will be against the amount borrowed by Ontario. The borrowing will result in Ontario receiving cash. The receipt of cash will increase the amount of cash which is a asset and it will be debited by the amount of cash received.

The note issued by Ontario is a liability for Ontario. An increase in liability will be recorded by a credit to notes payable account by the amount of the cash received by Ontario. It carries interest that will be recorded at the year end adjusting entry for the period that relates to this year. The remaining interest will be recorded when the note matures and the total amount of interest on note will be paid along with the principal at maturity.