Question

E10-1 Determining Financial Statement Effects of Transactions involving Notes Payable [LO 10-2] 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 $8.1 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 (a) 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 Liabilities Stockholders' Equity Date November 1, 2018 December 31, 2018 April 30, 2019

Answer 1

Stockholders' Equity Cash Date November 1, 2018 December 31, 2018 April 30, 2019 Assets Liabilities $81,00,000 = Notes Payable $81,00,000 + Interest Payable $1,28,250 + -$84,84,750 = Notes Payable |-$81,00,000 + = Interest Payable $1,28,250 + Interest Expense -$1,28,250 Interest Expense -$2,56,500 Cash Notes Payable Interest rate Interest Expense for Nov and Dec [($8100000 x 9.50%)/12 x 2] $81,00,000 9.50% $1,28,250 $2,56,500 Interest Expense for Jan to Apr [($8100000 x 9.50%)/12 x 4]