Question

Blanton Plastics, a household plastic product manufacturer, borrowed $28 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. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

1-1 Record the issuance of the note by Blanton Plastics

1-2 Record the L&T Bank's receivable

2.Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

2-1 Record the adjusting entry for the Blanton Plastics, on December 31, 2018

2-2 Record the adjusting entry for the L & T Bank, on December 31, 2018

2-3 Record the maturity for the Blanton Plastics, on January, 31 2019

2-4 Record the maturity for the L & T Bank, on 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. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

3-1 Record the issuance note, on October 01, 2018

3-2 Record the adjusting entry, on December 31, 2018

3-3 Record the interest expense, on January 31, 2019

3-4 Record payment of the note payable on January 31, 2019

(B) 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. (b) What would be the effective interest rate? (Do not round intermediate calculations and round your final answer to 1 decimal place.)

Annual effective rate? %

Answer 1

• All working forms part of the answer
• Amounts are in $
• Working for Interests expense

	Amount (in $ million)
Amount borrowed	28
Interest rate	12%
12 month interest	[28 x12%] 3.36
4 month Interest	[3.36 x 4/12] 1.12
Intt (Oct to Dec)	[1.12 x ¾] 0.84
Intt (Jan)	[1.12 x ¼] 0.28

• Requirement 1:

1. Journal entry in books of Blanton Plastics on notes issue

Date	Accounts Name	Dr (in $ million)	Cr (in $ million)
1-1 (Oct 1, 2018)	Cash	28
	Notes Payable		28

1. Journal Entry in books of L&T Bank on Note received

Date	Accounts Name	Dr (in $ million)	Cr (in $ million)
1-1 (Oct 1, 2018)	Accounts receivables	28
	Cash		28

• Requirement 2: Journal Entries in the books of Blanton plastic and L&T Bank

Blanton plastics

Date	Accounts Name	Dr (in $ million)	Cr (in $ million)
2-1 (Dec 31, 2018)	Interest expense	0.84
	Interest payable		0.84
2-3 (Jan 31, 2019)	Interest payable	0.84
	Interest expense	0.28
	Notes payable	28
	Cash		29.12

L&T Bank

Date	Accounts Name	Dr (in $ million)	Cr (in $ million)
2-2 (Dec 31, 2018)	Accrued Interest/Income	0.84
	Interest Revenue		0.84
2-4 (Jan 31, 2019)	Cash	29.12
	Accrued Interest/Income		0.84
	Interest Revenue		0.28
	Accounts receivable		28

• Requirement 3: Present Value of Non Interest Bearing Note is to be calculated.

--- 4months/12months = 0.333333……

PV=	Notes payable /[(1+12%)^0.333]
PV=	$2,696,199.5

Date	Accounts Name	Dr (in $)	Cr (in $)
3-1 (Oct 1, 2018)	Cash	2696199.5
	Discount on Notes payable	103800.5
	Notes Payable		2800000
3-2 (Dec 31, 2018)	Interest expense [103800.5 x ¾]	77850.4
	Discount on Notes payable		77850.4
3-3 (Jan 1, 2019)	Interest expense [103800.5 x ¼]	25950.1
	Discount on Notes payable		25950.1
3-4 (Jan 31, 2019	Notes payable	2800000
	Cash		2800000

• Requirement 4

Total Interest = $103,800.5
Notes Amounts = $2,800,000
Interest rate = 103800.5 / 2800000 = 3.71% [4 months]
Annual Effective Interest Rate will be = 3.71 x 12months/4months = 11.12%