Transaction 3:
On the 1 June 201X the managers of the sales, production and logistics departments had a meeting
with the chief executive officer (CEO) and chief financial officer (CFO) of Large Mart to discuss the
company’s plans for the next financial year. During the meeting it was decided that Large Mart will
expand its operations in the next financial year.
During the meeting it was estimated that the expansion plan would cost approximately $1,000,000.
At the end of the meeting the CFO was asked to meet with the company’s bank to determine if the
bank would be willing to give Large Mart a loan of $1,000,000 to pay for the expansion.
After meeting with the bank manager, the CFO has reported back that the bank will only give Large
Mart a loan of $100,000. On the 5 June 201X the leaders of the sales, production and logistics
departments meet again with the CEO and the CFO to discuss the banks answer. In this meeting it is
decided that Large Mart should take the banks offer and sign a loan contract for $100,000.
On the day after the meeting (on 6 June 201x) the CFO goes to the bank and signs the loan contract.
The contract states that Large Mart will be given a $100,000 loan for a period of four years, that
Large Mart is required to pay 6% interest per year (with interest payments being made at the end of
each year during the loan period – the first payment will be required one year after the contract is
signed), and that the whole principle will be repaid in one lump sum at the end of the loan period
(this means that there are no repayments of the principal during the loan period). The bank then
paid the full $100,000 loan amount to Large Mart on 6 June 201x.
Required:
1. Determine if the signing of the loan contract creates a liability, a contingent liability or a
provision for Large Mart
2. Provide all journal entries to record the signing of the loan contract and the receipt of funds
by Large Mart
3. Determine if the interest for the loan that arises during the month of June 201X creates a
liability, a contingent liability or a provision for Large Mart and calculate the amount of
interest that arises during June 201X