Question

Blanton Plastics, a household plastic product manufacturer, borrowed $25 million cash on October 1, 2021, to provide working capital for year-end production. Blanton issued a four-month, 9% 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, 2021.
2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2022.
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% 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, 2021, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?

Answer 1

Prepare the journal entries as follows: Credit Date Account Title Oct 01, 2021 Cash Note payable Debit $25,000,000 a $25,000,000 | $25,000,000 Oct. 01. 2021 Notes receivable Cash $25,000,000 Prepare the journal entries as follows: Blanton Plastics: Adjusting entry at December 31, 2021

Credit Debit $562,500 Account Title Interest Expense Interest payable (S25000000 x 9% x 3/12) $562.500 L&T Bank Adjusting entry at December 31, 2021 Credit Account Title Interest receivable Interest revenue Debit $562.500 $562,500 Maturity (January 31, 2022) Blanton Plastics: Credit Account Title Interest Expense ($25000000 x 9% < 1/12) Interest payable Notes payable Cash Debit $187,500 $562,500 $25,000,000 $25.750.000 L&T Bank

Credit Debit $25,750,000 Account Title Cash Interest revenue Interest receivable Notes receivable $187,500 $562.500 $25,000,000 Issuance of Notes: Credit Account Title Cash Discount on notes payable Notes payable | Debit $24.250,000 $750,000 $25,000,000 Adjusting entry as follows:

Credit Account Title Interest expense Discount on notes payable Debit $562.500 $562,500 Maturity Credit Account Title Interest expense Discount on notes payable Debit $187,500 $187.500 $25,000,000 Notes payable Cash $25,000,000