Question

The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal year ends on December 31.

2021

Jan.		13		Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $25.0 million at the bank’s prime rate.
Feb.		1		Arranged a three-month bank loan of $2.0 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 13% was payable at maturity.
May		1		Paid the 13% note at maturity.
Dec.		1		Supported by the credit line, issued $17.6 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 12% discount rate.
		31		Recorded any necessary adjusting entry(s).

2022

Sept.

1

Paid the commercial paper at maturity.

Required:

Prepare the appropriate journal entries through the maturity of each liability.

Answer 1

Date	General Journal	Debit	Credit
Jan.13,2021	No journal entry required
Feb.1,2021	Cash	$2,000,000
	Note Payable		$2,000,000
	(To record bank loan)
May.1,2021	Note Payable	$2,000,000
	Interest Expenses ($2,000,000*13%*3/12)	$65,000
	Cash		$2,065,000
	(To record payment of note at maturity)
Dec.1,2021	Cash	$16,016,000
	Discount on note payable ($17,600,000*12%*9/12)	$1,584,000
	Note Payable		$17,600,000
	(To record issuance of $17.6 million of commercial paper)
Dec.31,2021	Interest Expense ($1,584,000*1/9)	$176,000
	Discount on note payable		$176,000
	(To record adjusting entry)
Sept.1,2022	Interest Expense ($1,584,000 - $176,000)	$1,408,000
	Discount on note payable		$1,408,000
	(To record interest expense)
Sept.1,2022	Note Payable	$17,600,000
	Cash		$17,600,000
	(To record repayment of commercial paper at maturity)