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 $8.0 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 9.00 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.) Stockholders' Equity Liabilities Date Assets November 1, 2018 December 31 2018 April 30, 2019

Answer 1

Refer computation below, the calculation has been made on assumption that 9% interest rate is for 6 months:

Accounting Entries for each transaction Dr./Cr. Debit Credit Particulars November 1, 2018 80,00,000.0 Bank A/C To, Loan A/C (Being loan availed) 80,00,000.0 December 31, 2018 Interst expense A/c Dr. 2,40,000.0 To, Interest accrued A/c Cr. (Being accrual of interest for 2 months @ 9% recorded in books) 2,40,000.0 April 30, 2019 Loan A/C Dr. 80,00,000.0 Interest Expense A/c Dr. 4,80,000.0 Interest Accured A/c Dr. 2,40,000.0 To, Cash A/C (Being settlement of loan made, along with interest @9%) 87,20,000.0 Accounting equation for each effect Stakeholder's equity Date November 1, 2018 December 31, 2018 April 30, 2019 Assets = Liabilities 80,00,000.0 80,00,000.0 2,40,000.01 | -87,20,000.0|| -82,40,000. 0 0 -2,40,000.0 -4,80,000.0