Question

On April 15, 2016, Powell, Inc., obtained a six-month working capital loan from its bank. The face amount of the note signed by the treasurer was $186,400. The interest rate charged by the bank was 6.25%. The bank made the loan on a discount basis.

Use the horizontal model to show the effect of signing the note and the receipt of the cash proceeds on April 15, 2016 (Use amounts with + for increases and amounts with – for decreases.)

Answer 1

• When a working capital loan is obtained, it will result in:

>Increase in Cash balance [Increase in Assets] because cash is being received when loan amount is received, and

>Increase in Current Liability – Short term borrowing because the Loan will have to repaid.

• Effect of the transaction:

ASSETS			LIABILITIES			STOCKHOLDER'S EQUITY
Cash	Accounts receivables	Other Assets	Short Tem Loan	Accounts Payable	Long Term Loan	Common Stock	Retained Earnings
$          186,400.00			$ 186,400.00
Increase			Increase