Question

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. FederalWay, Inc., is one of America's most prestigious retailers. Each Christmas season, FederalWay builds up its inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As a result, FederalWay often collects cash from the sales several months after Christmas. Assume that on November 1 of this year, FederalWay borrowed $4.7 million cash from Third Fifth Bank to meet short-term obligations. FederalWay signed an interest-bearing note and promised to repay the $4.7 million in six months. The annual interest rate was 10%. All interest will accrue and be paid when the note is due in six months. FederalWay’s accounting period ends December 31.

Required:

1. Prepare the journal entry to record the note on November 1.

2. Prepare any adjusting entry required at the end of the annual accounting period on December 31.

3. Prepare the journal entry to record payment of the note and interest on the maturity date, April 30.

(For all requirements, If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars not in millions (i.e., 1,000,000 not 1.0).)

1. Record the note on November 1.

Date	General Journal	Debit	Credit
November 1

2. Record the adjusting entry for interest at the end of the annual accounting period.

December 31	General Journal	Debit	Credit

3. Record the payment of the note and interest on the maturity date.

April 30	General Journal	Debit	Credit

Answer 1

1
		Debit	Credit
November 1	Cash	4700000
	Notes payable		4700000
2
December 31	Interest expense	78333		=4700000*10%*2/12
	Interest payable		78333
3
April 30	Interest expense	156667		=4700000*10%*4/12
	Interest payable	78333
	Notes payable	4700000
	Cash		4935000