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 $6.8 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 7.50 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, 1. Record the borrowing of $6,800,000. 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

Journal Entry

November 1 2015

Cash Account.........................Dr 68000000

To Note Payable 6800000

(Being amount borrowed and note issued in exchange)

December 31

Interest Expense .........................Dr ( 6800000*7.50%*2/12) 85000

To Interest payable on not 85000

( Being Interest Expense Booked )

April 30 2016

Interest Expense ...............................DR ( 6800000*7.5%*4/12) 170000

Tp Interest payable on note 170000

( Being Interest Expense booked for 6 months)

Note Payable A/c ...........................Dr 6800000

Interest payable on note ...............Dr 255000

To Cash/Bank 7055000

( Being note payable paid off and interest paid off)

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