In: Accounting
Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 12% promissory note to L&T Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm’s fiscal period is the calendar year. Required: 1. Prepare the journal entries to record (a) the issuance of the note by Blanton Plastics and (b) L&T Bank’s receivable on October 1, 2018. 2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019. 3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 12% is the bank’s stated discount rate. (a) Prepare the journal entries to record the issuance of the noninterest-bearing note by Blanton Plastics on October 1, 2018, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?
SOLUTION
1.
S.No. | Account titles and Explanation | Debit ($) | Credit ($) |
A. | Blanton Plastics | ||
Cash | 14,000,000 | ||
Notes Payable | 14,000,000 | ||
B. | L & T Bank | ||
Notes receivable | 14,000,000 | ||
Cash | 14,000,000 |
2.
S.No. | Account titles and Explanation | Debit ($) | Credit ($) |
A. | Adjusting entries (December 31, 2018) | ||
Blanton Plastics | |||
Interest expense | 420,000 | ||
Interest payable ($14,000,000*12%*4/12) | 420,000 | ||
L & T Bank | |||
Interest receivable | 420,000 | ||
Interest revenue | 420,000 | ||
Maturity (January 31, 2019) | |||
Blanton Plastics | |||
Interest expense | 140,000 | ||
Interest payable | 420,000 | ||
Notes payable | 14,000,000 | ||
Cash | 14,560,000 | ||
L & T Bank | |||
Cash | 14,560,000 | ||
Interest receivable | 420,000 | ||
Interest revenue | 140,000 | ||
Notes receivable | 14,000,000 |
3.
S.No. | Account titles and Explanation | Debit ($) | Credit ($) |
A. | Issuance of note (October 1, 2018) | ||
Cash | 13,440,000 | ||
Discount on notes payable | 560,000 | ||
Notes payable | 14,000,000 | ||
B. | Adjusting entry (December 31, 2018) | ||
Interest expense | 420,000 | ||
Discount on notes payable | 420,000 | ||
Maturity (January 31, 2019) | |||
Interest expense | 140,000 | ||
Discount on notes payable | 140,000 | ||
Notes payable | 14,000,000 | ||
Cash | 14,000,000 |
Annual effective rate - 12.5%