Anthony Loaned 2000 To Cleopatra For One Year At 10% Interes

Anthony Loaned 2000 To Cleopatra For One Year At 10 Interest All D

Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation: Select one: a. The maturity value of the note is $2,000. b. Anthony is considered the maker of the note and records the note as an asset in his accounting records. c. Anthony is considered the maker of the note and records the note as a liability in his accounting records. d. Cleopatra is considered the maker of the note and records the note as a liability in her [his] accounting records.

Paper For Above instruction

In the scenario where Anthony loans $2,000 to Cleopatra at an interest rate of 10% with all terms formalized in a promissory note, understanding the roles and accounting entries involved is crucial for accurate financial reporting. Typically, when a loan is made, the lender (Anthony) is considered the "maker" of the note, which signifies the entity that commits to paying or receiving the funds under the terms of the agreement. Conversely, the borrower (Cleopatra) is the "payee" or the "maker" of the note in her capacity as the recipient of the loan.

In this context, when Anthony loans money to Cleopatra and records a promissory note, he records the note as an asset. This is because the note represents a legal right to receive cash (the principal plus interest) at the note's maturity date. As an asset, the note appears on Anthony's balance sheet under receivables or notes receivable, depending on the specific accounting terminology used. The asset valuation includes the principal amount of $2,000 plus the interest accrued over the period to the maturity date.

On the other hand, Cleopatra, as the borrower and maker of the note, will recognize a liability, representing her obligation to repay the amount borrowed plus interest. From her perspective, the note is a liability, which she records on her balance sheet as a note payable. When the note matures, she will settle the amount owed by paying the principal plus interest to Anthony.

Regarding the multiple-choice options provided, option (b) correctly states that Anthony is considered the maker of the note and records the note as an asset in his accounting records. This aligns with standard accounting principles, which treat notes receivable as assets for the lender who is the note’s maker. Option (c), which states that Anthony records the note as a liability, is incorrect because liabilities represent obligations owed to external parties, not receivables. Options (a) and (d) are also inaccurate because the maturity value of the note is not solely the principal; it includes the interest accrued, and Cleopatra, being the borrower, does not record the note as a liability in her business system.

References

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  • FASB Accounting Standards Codification. (2023). Revenue Recognition. Financial Accounting Standards Board.
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  • Financial Accounting Standards Board (FASB). (2022). Accounting Standards Update 2022-XX. Effect of Accounting Changes and Error Corrections.

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