[JJ2006]

Part I. 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 1,2006, Neiman Marcus borrowed $8 million cash from Texas Capital Bank for working capital purposes and signed an interest-bearing note due in six months. Tne interest rate was 8 percent per annum payable at maturity. The accounting period ends on 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.If Neiman Marcus needs extra cash during every Christmas season, should manangement borrow money on a long-term basis to avoid the neccessity of negotiating a new short-term loan each year? Why or why not?

Part II. Determining Financial Statement effects of Transactions Involving Notes Payable. Using the data and information from Part I, complete the following requirements:

1. Determine the financial statement effects for each of the following:(a) issuance of the note on November 1, (b) impact of the adjusting entry at the end of the accounting period, and (c) payment of the note and interest on April 30,2007. Indicate the effects (e.g. cash + or -), using the following table:

Date Assets = Liabilities + Stockholders'Equity

2.If Neiman Marcus 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? Why oy why not?"

[Curlyben]

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