Question

Blanton Plastics, a household plastic product manufacturer, borrowed $28 million cash on October 1, 2021, 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, 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 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, 2021, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?

Answer 1

Answer:

1.)

Date	Particulars	Debit ($)	Credit ($)
10/1/2021	Cash	28,000,000
	Notes payable		28,000,000
	(To record the issue of note)
10/1/2021	Notes receivable	28,000,000
	Cash		28,000,000
	(To record the notes receivable)

2.)
Adjusting entries on December 31, 2021

Date	Particulars	Debit ($)	Credit ($)
31/12/2021	Interest expense (28000000*12%*3/12)	840,000
	Interest payable		840,000
	(To record the issue of note)
31/12/2021	Interest receivable (28000000*12%*3/12)	840,000
	Interest revenue		840,000
	(To record the notes receivable)

Journal entries on Maturity

Date	Particulars	Debit ($)	`Credit ($)
31/01/2022	Interest expense (28000000*12%*1/2)	280,000
	Interest payable (28000000*12%*3/12)	840,000
	Notes payable	28,000,000
	Interest payble		29,120,000
	(To record the issue of note)
31/01/2022	Cash	29,120,000
	Interest receivable (28000000*12%*3/12)		840,000
	Interest revenue (28000000*12%*1/12)		280,000
	Notes receivable		28,000,000
	(To record the issue of note)

3.)

Date	Particluars	Debit ($)	Credit ($)
1/10/2021	Cash	26,880,000
	Discount on notes payable (28000000126*4/12)	1,120,000
	Notes payable		28,000,000
	(To record the issue of notes)
31/12/2021	Interest expense (28000000*12%*3/12)	840,000
	Discount on notes payble		840,000
	(To record the interest expense)
31/01/2022	Interest expense (28000000*12%*1/12)	280,000
	Discount on notes payable		280,000
	(To record the interest expense)
31/01/2022	Notes payable	28,000,000
	Cash		28,000,000
	(To record the redemption of note at matturity)

Working notes:

Effective interest rate = (Interest amount/cash received from notes payable) x (12 months/4 months)
=(1120000/26880000) x (12/4)
=12.5%