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

• A. The buyer records a debit to Notes Receivable and a credit to Interest Revenue.
• B. The seller records a debit to Interest Expense and a credit to Notes Receivable.
• C. The seller records a debit to Cash and a credit to Notes Receivable.
• D. The seller records a debit to Notes Payable and a credit to Cash.

Answer: (C)

Verified step by step guidance

1. 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.
2. 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.
3. 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).
4. 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.
5. 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.