Question

Blanton Plastics, a household plastic product manufacturer, borrowed $7 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 15% 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 15% 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

Answer 1.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
a. Blanton Plastics
1-Oct-18	Cash	7,000,000.00
	Notes Payable		7,000,000.00
	(record the issue of Note)
b. L & T Bank
1-Oct-18	Notes Receivable	7,000,000.00
	Cash		7,000,000.00
	(record the loan given to Balton against Note)
Answer 2.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
Blanton Plastics
31-Dec-18	Interest Expenses	262,500.00		$7,000,000 X 15% X 3/12
	Interest Payable		262,500.00
	(record the interest expense)
31-Jan-19	Interest Expenses	87,500.00		$7,000,000 X 15% X 1/12
	Interest Payable	262,500.00
	Notes Payable	7,000,000.00
	Cash		7,350,000.00
	(Record the interest & Notes Paid)
L & T Bank
31-Dec-18	Interest Receivable	262,500.00		$7,000,000 X 15% X 3/12
	Interest Revenue		262,500.00
	(record the interest revenue on note)
31-Jan-19	Cash	7,350,000.00
	Interest Revenue		87,500.00	$7,000,000 X 15% X 1/12
	Interest Receivable		262,500.00
	Notes Receivable		7,000,000.00
	(Record the Notes and Interest recd.)
Answer 3-a.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
Blanton Plastics
1-Oct-18	Cash	6,650,000.00
	Discount on Issue of Note	350,000.00		$7,000,000 X 15% X 4/12
	Notes Payable		7,000,000.00
	(record the issue of Note)
31-Dec-18	Interest Expenses	262,500.00		$7,000,000 X 15% X 3/12
	Discount on Issue of Note		262,500.00
	(record the interest expense)
31-Jan-19	Interest Expenses	87,500.00		$7,000,000 X 15% X 1/12
	Discount on Issue of Note		87,500.00
	(record the interest expense)
31-Jan-19	Cash	7,000,000.00
	Notes Payable	-	7,000,000.00
	(Record the Notes Paid)
Answer 3-b.
Annual Effective Interest Rate = $350,000 / $6,650,000 X 12/4
Annual Effective Interest Rate = 15.79% (Approx.)