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 $7.6 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 7.00 percent payable at maturity. The accounting period ends December 31.

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 $7,600,000.

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.

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 $7.6 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 7.00 percent payable at maturity. The accounting period ends December 31.

Explanation / Answer

Working Note

Calculation of Interest Expense on Dec 31

7600000 * 7% * 2/12 = $88667

Calculation of Interest Expense on repayment

7600000 * 7% * 4/12 = $177,333

Sno Date Particulars Debit Credit 1 November 1, 2015 Cash A/c $7,600,000 Note Payable $7,600,000 Borrowed on 6 months, 7% Note Payable 2 December 31, 2015 Interest Expense $88667 Interest Payable $88667 3 Note Payable $7,600,000 Interest Payable $88,667 Interest Expense $177,333 Cash $7,866,000

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