Many businesses borrow money during periods of increased business activity to fi

Question

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Target Corporation is one of America’s largest general merchandise retailers. Each Christmas, Target builds up its inventory to meet the needs of Christmas shoppers. A large portion of Christmas sales are on credit. As a result, Target often collects cash from the sales several months after Christmas. Assume that on November 1, 2013, Target borrowed $6 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 8.0 percent payable at maturity. The accounting period ends December 31.

Indicate the accounts, amounts, and effects (+ for increase, – for decrease) of the (a) issuance of the note on November 1, (b) impact of the adjusting entry on December 31, 2013, and (c) the payment of the note and interest on April 30, 2014, on the accounting equation. (Do not round intermediate calculations. Enter your answers in dollars. Enter all amounts as positive values.)

Required:

Explanation / Answer

Journal Entries :

DEBIT

($)

CREDIT

($)

DATE PARTICULARS

DEBIT

($)

CREDIT

($)

01/11/2013 BANK A/C DR.... 60,00,000 TO METROPOLITAN BANK A/C 60,00,000 ( Being amount borrowed from Metropolitan bank & signed promissory note) 31/12/2013 INTEREST A/C DR.... 80,000 TO INTEREST PAYABLE A/C 80,000 (Being interest credited to interest payable a/c at accounting year end for 2 months i.e 60,00,000*2/12*8%) 31/12/2013 P&L A/C DR... 80,000 TO INTEREST A/C 80,000 (Being interest amount transferred to p&l a/c at accounting year end) 30/04/2014 INTEREST A/C DR.... 1,60,000 TO INTEREST PAYABLE A/C 1,60,000 (Being 4 months interest credited to interest payable a/c i.e 60,00,000*4/12*8%) 30/04/2014 METROPOLITAN BANK A/C DR... 60,00,000 INTEREST PAYABLE A/C DR.... 2,40,000 TO BANK A/C 62,40,000 (Being Loan amount and interest there on is paid) 31/12/2014 P&L A/C DR.... 1,60,000 TO INTEREST A/C 1,60,000 (Being Interest a/c transferred to P&L a/c at accounting year end Dec,2014)

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