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, 2015, Target borrowed $7.1 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 9.00 percent payable at maturity. The accounting period ends December 31.

Required: 1,2&3. Complete the required journal entries to record the note on November 1, 2015, interest on the maturity date, April 30, 2016, assuming that interest has not been recorded since December 31, 2015. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

1.Record the borrowing of $7,100,000.

2.Record the interest accrued on the note payable as of December 31, 2015.

3.Record the repayment of the note plus interest on the maturity date.

Explanation / Answer

Answer

For 2 months, interest will be $0.3195 million x 2months/6months = $0.1065 millions
For remaining 4 months, Interest will be $0.3195 millions - $0.1065 millions = $0.213 millions

Date

General Journal

Dr

Cr

01-Nov-15

Cash

7100000

Notes Payable (9%)

7100000

(Cash received as Loan)

31-Dec-15

Interest Expense

106500

Interest payable

106500

(2 months interest recognised as ‘due’)

30-Apr-15

Notes Payable (9%) (paid)

7100000

Interest Expense (4 months interest recognised and paid)

213000

Interest payable (2 months interest paid)

106500

Cash

7419500

(Notes payable paid, along with full interest of $0.3195 millions)

Date

General Journal

Dr

Cr

01-Nov-15

Cash

7100000

Notes Payable (9%)

7100000

(Cash received as Loan)

31-Dec-15

Interest Expense

106500

Interest payable

106500

(2 months interest recognised as ‘due’)

30-Apr-15

Notes Payable (9%) (paid)

7100000

Interest Expense (4 months interest recognised and paid)

213000

Interest payable (2 months interest paid)

106500

Cash

7419500

(Notes payable paid, along with full interest of $0.3195 millions)

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