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Short Term Debt (BTN 11-6) Wk 6 Team discussion Celtics P.507 Due:2-21

Assume that your team is in business and you must borrow $6,000 cash for short-term needs. You have been shopping banks for a loan, and you have the following two options.

A. Sign a $6,000, 90-day, 10% interest-bearing note dated June 1.

Interest Expense = ($6,000 x 10%) x

=$150

B. Sign a $6,000, 120-day, 8% interest-bearing note dated June 1.

Interest Expense = ($6,000 x 8%) x

=$160

The interest expense that is in option B does in fact exceed option A. However if merely the $10 more is paid in interest expense, the business would be able to use the loan money for an additional thirty days. There is a factor of which decision on loan would be preferred would ultimately depend on whether interest cost savings is valued more than the additional time to use the money that was loaned

Required

1. Discuss these two options and determine the best choice. Ensure that all teammates concur with the decision and understand the rationale.

2. Each member of the team is to prepare one of the following journal entries.

a. Option A---at date of issuance.

Date Details Debit Credit

1-June Cash $6,000

Notes Payable $6,000

(To record borrowed cash

issuing an interest-bearing note)

b. Option B---at date of issuance. Debit Credit

1-June Cash $6,000

Notes Payable $6,000

(To record borrowed cash

Issuing an interest-bearing note)

c. Option A---at maturity date.

Aug-30 Notes Payable $6,000

Interest Expense $150

Cash $6,150

(To record payment of notes payable

with interest)

d. Option B---at maturity date.

Sept-29 Notes Payable $6,000

Interest Expense $160

Cash

(To record payment of notes payable

with interest)

3. In rotation, each member is to explain the entry he or she prepared in part 2 to the team. Ensure that all team members concur with and understand the entries.

Option A- When issuing interest bearing notes cash is received. Hence, cash is debited. Notes payable is a liability. Hence, notes payable is credited.

Option B- When issuing interest bearing notes cash is received. Hence, cash is debited. Notes payable is a liability. Hence, notes payable is credited.

Option C- When payment on notes payable with interest expense on its maturity then notes payable account and interest expenses are debited. Cash account is credited.

Option D- When payment on notes payable with interest expense on its maturity then notes payable account and interest expenses are debited. Cash account is credited.

4. Assume that the funds are borrowed on December 1 (instead of June 1) and your business operates on a calendar-year reporting period. Each member of the team is to prepare one of the following entries.

a. Option A---the year-end adjustment.

Date Details Debit Credit

Dec-31 Interest Expense $50

Interest Payable $50

(To record accrue interest on notes

payable)

b. Option B---the year-end adjustment.

Interest Expense $40

Interest Payable $40

(To record accrue interest on notes

payable)

c. Option A---at maturity date.

March-1 Interest Expense $100

Interest Payable $50

Note Payable $6,000

Cash $6,150

(To record payment of notes with interest

on maturity date)

d. Option B---at maturity date.

March-31 Interest Expense $120

Interest Payable $40

Notes Payable $6,000

Cash $6,160

(To record payment of notes with interest

on maturity date)

5. In rotation, each member is to explain the entry he or she prepared in part 4 to the team. Ensure that all team members concur with and understand the entries.

Option A- Interest Expenses on notes payable are expenditure. Hence, it is debited. Interest Payable is a liability. Hence, it is credited.

Option B- Interest Expense on notes payable are expenditure. Hence, is debited. Interest Payable is a liability. Hence is credited.

Option C- Payment of notes with interest at maturity date.

Option D- Payment of notes with interest at maturity date.