Chapter 10, Problem 1E

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. For example, Mattel builds up its inventory to meet the needs of retailers selling to Christmas shoppers. A large portion of Mattel’s sales are on credit. As a result, Mattel often collects cash from its sales several months after Christmas. Assume on November 1, 2018, Mattel 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. 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, 2018; and (c) the payment of the note and interest on April 30, 2019, on the accounting equation. Use the following structure for your answer:

1. 2. If Mattel needs extra cash prior to 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.