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Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to...

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?

Solutions

Expert Solution

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%


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