Question

1

Blanton Plastics, a household plastic product manufacturer, borrowed $24 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 15% 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 15% 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

	Date	General Journal	Debit	Credit
		Blanton Plastics
a	1-Oct-18	Cash	24,000,000
		Note Payable		24,000,000
		L & T Bank
b	1-Oct-18	Notes receivable	24,000,000
		Cash		24,000,000
2		Adjusting entries (December 31, 2018)
	Dec 31 2018	Blanton Plastics
		Interest expense	900000
		Interest payable		900000
		24000000*15%*3/12
		L & T Bank
		Interest receivable	900000
		Interest Revenue		900000
		24000000*15%*3/12
	Jan 31 2019	Maturity (January 31, 2019)
		Blanton Plastics
		Interest expense 24000000*15%*1/12	300000
		Interest payable	900000
		Notes payable	24,000,000
		Cash		25200000
		L & T Bank
		Cash	25200000
		Interest revenue		300000
		Interest receivable		900000
		Interest receivable		24,000,000
3-a		General Journal	Debit	Credit
	1-Oct-18	Cash	22,800,000
		Discount on notes payable 24000000*15%*4/12	1200000
		Notes payable		24,000,000
	Dec 31 2018	Interest expense	900000
		Discount on notes payable		900000
	Jan 31 2019	Interest expense	300000
		Discount on notes payable		300000
		Notes payable	24,000,000
		Cash		24,000,000
3-b		Effective interest rate:
		Discount ($24,000,000 × 15 × 4/12)		1200000
		Cash proceeds		22,800,000
		Interest rate for 4 months		5.26%
		Annual effective rate 2.74*12/4		15.79%