Chapter 9, Problem 9.4E

Recording a Note Payable through Its Time to Maturity with Discussion of Management Strategy

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 will accrue and be paid when the note is due in six months. Neiman Marcus’s accounting period ends December 31.

Required:

1. 1. Provide the journal entry to record the note on November 1.
2. 2. Provide any adjusting entry required at the end of the annual accounting period on December 31.
3. 3. Provide the journal entry to record payment of the note and interest on the maturity date, April 30.
4. 4. If Neiman Marcus needs extra cash during every Christmas season, should management borrow money on a long-term basis to avoid the necessity of negotiating a new short-term loan each year?