Question

Problem 13-1 Bank loan; accrued interest [LO13-2]

Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 12% promissory note to L&T Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm’s fiscal period is the calendar year.
   
Required:
1. Prepare the journal entries to record (a) the issuance of the note by Blanton Plastics and (b) L&T Bank’s receivable on October 1, 2018.
2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019.
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 12% is the bank’s stated discount rate. (a) Prepare the journal entries to record the issuance of the noninterest-bearing note by Blanton Plastics on October 1, 2018, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?

Answer 1

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Part 1
Event	Date	Account	Debit	Credit
Blanton	Oct 1 2018	Cash	$14,000,000
		Note Payable		$14,000,000
		(To record issuance of Note)
L&T Bank	Oct 1 2018	Note Receivable	$14,000,000
		Cash		$14,000,000
		(To record Note receivable by Bank)
Part 2
Event	Date	Account	Debit	Credit
Blanton	Dec 31 2018	Interest Expense	$     420,000
		Interest Payable		$     420,000
		(To record interest accrued) ($14,000,000*12%*3/12)
L&T Bank	Dec 31 2018	Interest Receivable	$     420,000
		Interest Revenue		$     420,000
		(To record interest accrued) ($14,000,000*12%*3/12)
Blanton	Jan 3 12019	Interest Expense ($14,000,000*12%*1/12)	$     140,000
		Interest Payable	$     420,000
		Note Payable	$14,000,000
		Cash		$14,560,000
		(To record interest and note payment)
L&T Bank	Jan 3 12019	Cash	$14,560,000
		Interest Revenue ($14,000,000*12%*1/12)		$     140,000
		Interest Receivable		$     420,000
		Note Payable		$14,000,000
		(To record interest and note payment)
Part 3a
Event	Date	Account	Debit	Credit
Blanton	Oct 1 2018	Cash	$13,440,000
		Discount on Notes Payable ($14,000000*12%*4/12)	$     560,000
		Note Payable		$14,000,000
		(To record issuance of Note)
	Dec 31 2018	Interest Expense ($14,000,000*12%*3/12)	$     420,000
		Discount on Note Payable		$     420,000
		(To record interest expense)
	Jan 1 2019	Interest Expense ($14,000,000*12%*1/12)	$     140,000
		Discount on Note Payable		$     140,000
		(To record interest expense)
	Jan 1 2019	Note Payable	$14,000,000
		Cash		$14,000,000
		(To record payment of Note)
Part 3b
		Discount on Note Payable	A	$     560,000
		Cash Proceeds	B	$13,440,000
		Interest Rate for 4 Months	A/B	4.17%
		Annual Effective Rate	4.17*12/4	12.50%