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 $6.7 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 7.00 percent payable at maturity. The accounting period ends December 31.

Required:

1, 2 & 3. Prepare the required journal entries to record the note on November 1, 2018, interest on the maturity date, April 30, 2019, assuming that interest has not been recorded since December 31, 2018. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

1. Record the borrowing of $6,700,000.

2. Record the interest accrued on the note payable as of December 31, 2018.

3. Record the repayment of the note plus interest on the maturity date.

Answer 1

Solution:

Journal Entries - Mitt
Event	Particulars	Debit	Credit
1	Cash Dr	$6,700,000.00
	To Notes Payable		$6,700,000.00
	(To record borrowings from bank by issuing promissory note)
2	Interest Expense Dr ($6,700,000*7%*2/12)	$78,167.00
	To Interest Payable		$78,167.00
	(To record interest accrued)
3	Notes Payable Dr	$6,700,000.00
	Interest Payable Dr	$78,167.00
	Interest Expense Dr ($6,700,000*7%*4/12)	$156,333.00
	To Cash		$6,934,500.00
	(To record payment of note on maturity)