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, 2011, Neiman Marcus borrowed $4.8 million cash from Texas Capital Bank for working capital purposes and signed an interest bearing note due in six months. The interest rate was 8 percent per annum payable at maturity. The accounting period ends December 31.
1. Give the journal entry to record the note on November 1.
2. Give any adjusting entry required at the end of the annual accounting period.
3. Give the journal entry to record payment of the note and interest on the maturity date, April 30, 2012.
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?