Question

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Nordstrom, Inc., is one of America’s most prestigious retailers. Each Christmas season, Nordstrom builds up its inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As a result, Nordstrom often collects cash from the sales several months after Christmas. Assume that on November 1 of this year, Nordstrom borrowed $4.8 million cash from Bank of America to meet short-term obligations. Nordstrom signed an interest-bearing note and promised to repay the $4.8 million in six months. The annual interest rate was 8%. All interest will accrue and be paid when the note is due in six months. Nordstrom’s accounting period ends December 31.

Required:

1. Determine the financial statement effects for each of the following: (a) the issuance of the note on November 1, (b) the impact of the adjusting entry at the end of the accounting period, and (c) payment of the note and interest on April 30. Indicate the effects (e.g., cash + or −) using the following schedule. (If no impact on the accounting equation leave cells blank. Indicate the direction of the effect by selecting "+" for increase, "−" for decrease from the drop down menu.)

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Nordstrom, Inc., is one of America's most prestigious retailers. Each Christmas season, Nordstrom builds up its inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As a result, Nordstrom often collects cash from the sales several months after Christmas. Assume that on November 1 of this year, Nordstrom borrowed $4.8 million cash from Bank of America to meet short-term obligations. Nordstrom signed an interest-bearing note and promised to repay the $4.8 million in six months. The annual interest rate was 8%. All interest will accrue and be paid when the note is due in six months. Nordstrom's accounting period ends December 31. Required: 1. Determine the financial statement effects for each of the following: (a) the issuance of the note on November 1, (b) the impact of the adjusting entry at the end of the accounting period, and (c) payment of the note and interest on April 30. Indicate the effects (e.g., cash + or -) using the following schedule. (If no impact on the accounting equation leave cells blank. Indicate the direction of the effect by selecting "+" for increase, "-" for decrease from the drop down menu.) Date Assets Liabilities Stockholders' Equity November 1 December 31 April 30

Answer 1

1

Date

Assets

Liabilities

Stockholder's equity

November 1.

Cash

4800000

Note payable

4800000

December 31.

Interest payable

Interest expense

(Interest accrued for Nov and Dec -2 months)

(4800000*8%*2/12)

64000

(4800000*8%*2/12)

-64000

April 30.

Cash

-4992000

Interest payable

-64000

Interest expense

(4800000+64000+128000)

Note payable

-4800000

(4800000*8%*4/12)

-128000

(Interest recorded from Jan to Apr-4 months)