Question

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. For example, Mitt builds up its inventory to meet the needs of retailers selling to Christmas shoppers. A large portion of Mitt's sales are on credit. As a result, Mitt often collects cash from its sales several months after Christmas. Assume on November 1, 2018, Mitt borrowed $7.2 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 9.50 percent payable at maturity. The accounting period ends December 31. Required: 1. Indicate the accounts, amounts, and effects of the (0) Issuance of the note on November 1: (b) impact of the adjusting entry on December 31, 2018; and (c) the payment of the note and interest on April 30, 2019, on the accounting equation. (Do not round Intermediate calculations. Enter your answers in whole dollars. Enter any decreases to assets, liabilities, or stockholders equity with a minus sign.) Assets Cash 7,200,000 7.200.000 Date November 1, 2018 December 31, 2018 April 30, 2019 Liabilities Notes Payable (short-term) Pinterest Payable Notes Payable (short-term) interest Payable interes Cash interes

Answer 1

WORKING NOTES:
	CALCULATION OF INTEREST EXPENSES AS ON DECEMBER 31, 2018
	Value of Note Payable		=	$                                                    72,00,000
	Interest = $ 7,200,000 X 9.5% X 2 / 12 month		=	$                                                      1,14,000
	CALCULATION OF INTEREST EXPENSES AS ON APRIL 30, 2019
	Value of Note Payable		=	$                                                    72,00,000
	Interest = $ 7,200,000 X 9.5% X 4 / 12 month		=	$                                                      2,28,000
SOLUTION:
Date	Assets	Amount	=	Liabilities	Amount	+	Stockholder's Equity	Amount
November 01, 2018	Cash	$        72,00,000	=	Note Payable (Short Term)	$          72,00,000	+	0	$                       -
December 31, 2018		0	=	Interest Payable	$            1,14,000	+	Interest Expenses	$        -1,14,000
April 30, 2019	Cash	$      -75,42,000	=	Interest Payable	$          -1,14,000	+
				Note Payable (Short Term)	$        -72,00,000	+	Interest Expenses	$        -2,28,000