Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 46

Determining Financial Statement Effects of Transactions involving Notes Payable
Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Target Corporation is one of America's largest general merchandise retailers. Each Christmas, Target builds up its inventory to meet the needs of Christmas shoppers. A large portion of Christmas sales are on credit. As a result, Target often collects cash from the sales several months after Christmas. Assume that on November 1, 2013, Target borrowed $6 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 8.0 percent payable at maturity. The accounting period ends December 31.
Required:
1. Indicate the accounts, amounts, and effects (+ for increase, for decrease, and NE for no effect) of the ( a ) issuance of the note on November 1, ( b ) impact of the adjusting entry on December 31, 2013, and ( c ) the payment of the note and interest on April 30, 2014, on the accounting equation. Use the following structure for your answer:

2. If Target needs extra cash every Christmas season, should management borrow money on a long-term basis to avoid negotiating a new short-term loan each year Explain your answer.