Determining Financial Statement Effects of Transactions

Involving Notes Payable Many #2806

Determining Financial Statement Effects of Transactions Involving Notes Payable 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 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. Required:1. Indicate the accounts, amounts, and effects (+ for increase, – for
decrease, and NE for no effect) of the (a) issuance of the note on November 1; (b) impact of the
adjusting entry on December 31, 2015; and (c) the payment of the note and interest on April 30,
2016, on the accounting equation. Use the following structure for your answer:2. If Target needs
extra cash every Christmas season, should management borrow money on a long-term basis to
avoid negotiating a new short-term loan each year? Explain your answer.View Solution:
Determining Financial Statement Effects of Transactions Involving Notes Payable Many

ANSWER
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