Question

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Neiman Marcus is one of America's most prestigious retailers Each Christmas season, Neiman Marcus builds up its inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As a result, Neiman Marcus often collects cash from the sales several months after Christmas. Assume that on November 1 of this year, Neiman Marcus borrowed $4.8 million cash from Bank of America to meet short-term obligations. Neiman Marcus signed an interest-bearing note and promised to repay the $4.8 million in six months. The annual interest rate was 8%. All interest wil accrue and be paid when the note is due in six months. Neiman Marcus'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 (eg 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.) Assets Liabilities Stockholders' Equity Date November 1 December 31 April 30

Answer 1

Accounting equation

Date	Assets		=	Liabilities		+	Stockholder's equity
November 1	Cash	4800000		Notes payable	4800000
December 31				Interest payable (4800000*8%*2/12)	16000		Interest expense	-16000
Apr 30	Cash	-4848000		Notes payable	-4800000		Interest expense	-32000
				Interest payable	-16000