Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Hudson?s Bay Company (HBC) is Canada?s largest departmentstore. Each Christmas, HBC builds up its inventory to meet the needs of Christmas shoppers. A large portion of Christmas sales are on credit. As a result, HBC often collects cash from the sales several months after Christmas. Assume that on November 1, 2017, HBC borrowed $6 million cash from Downtown Bank and signed a promissory note that matures in six months. The interest rate was 7.5 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, 2017, and (c) the payment of the note and interest on April 30, 2018, on the accounting equation. Use the following structure for your answer:

2. If HBC 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.

Transcribed Image Text:

Liabilities + Shareholders' Equity Date Assets