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 trade receivables. Sears Canada Inc. is one of Canada’s largest general merchandise retailers. Each year, Sears Canada builds up its inventory to meet the needs of December holiday shoppers. A large portion of these holiday sales are on credit. As a result, Sears Canada often collects cash from the sales several months after the December holidays. Assume that on November 1, 2014, Sears Canada borrowed $4.5 million cash from the bank for working capital purposes and signed an interest-bearing note due in six months. The interest rate was 5 percent per annum, payable at maturity. Assume that the fiscal year of Sears Canada ends on December 31.

Prepare the journal entry to record the note on November 1, 2014. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars not in millions.)

Prepare any adjusting entry required at December 31, 2014. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars not in millions. Do not round intermediate calculations.)

Many businesses borrow money during periods of increased business activity to finance inventory and trade receivables. Sears Canada Inc. is one of Canada’s largest general merchandise retailers. Each year, Sears Canada builds up its inventory to meet the needs of December holiday shoppers. A large portion of these holiday sales are on credit. As a result, Sears Canada often collects cash from the sales several months after the December holidays. Assume that on November 1, 2014, Sears Canada borrowed $4.5 million cash from the bank for working capital purposes and signed an interest-bearing note due in six months. The interest rate was 5 percent per annum, payable at maturity. Assume that the fiscal year of Sears Canada ends on December 31.

Explanation / Answer

1)

Date            Particulars                     LF                     Debit                   Credit

Nov 14, 2014    Cash A/c Dr                                     $4,500,000

                           To Notes Payable A/c                                                      $4,500,000

(Being notes payable has recorded)

_______________________________________________________________________________

2) Dec 31, 2014 Interest Expense A/c Dr                   $225,000

                        To Interest Payable   A/c                                          $225,000

       (Being    Interest expense has recorded )

____________________________________________________________________________________

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