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.
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?

Answer 1

1) Journal Entries :-

Particulars	Debit($ in million)	Credit($ in million)
Cash A/c Dr.	28
To Notes Payable A/c		28
Notes Receivable A/c Dr.	28
To Cash A/c		28

2) Journal Entries :-

Date	Particulars	Debit($)	Credit($)
Dec. 31, 2018	Interest Expense A/c Dr.($28 million *12%)*(3/12)	840000
	To Interest Payable A/c		840000
Dec. 31, 2018	Interest Receivable A/c Dr.	840000
	To Interest Revenue A/c		840000
Jan. 31, 2019	Interest Expense A/c Dr. ($28 million * 12%)/12	280000
	Interest Payable A/c Dr.	840000
	Notes Payable A/c Dr.	28000000
	To Cash A/c		29120000
Jan. 31, 2019	Cash A/c Dr.	29120000
	To Interest Receivable A/c		280000
	To Interest Revenue A/c		840000
	To Notes Receivable A/c		28000000

3)a Journal Entries :-

Date	Particulars	Debit($)	Credit($)
Oct. 1, 2018	Cash A/c Dr.	26880000
	Discount on notes payable A/c Dr.(($28 million*12%)*(4/12))	1120000
	To Notes Payable A/c		28000000
Dec. 31, 2018	Interest Expense A/c Dr.	840000
	To Discount on Notes Payable		840000
Jan. 31, 2019	Interest Expense A/c Dr.	280000
	To Discount on Notes Payable A/c		280000
Jan. 31, 2019	Notes Payable A/c Dr.	28000000
	To Cash A/c		28000000

3)b Effective Interest Rate :-

= Interest Paid / Amount Borrowed

= $1120000 / $26880000

= 0.04167 or 4.167%

= 4.167 % * (12/4)

= 12.5 %