Question

Problem 13-1 Bank loan; accrued interest (LO13-2) Blanton Plastics, a household plastic product manufacturer, borrowed $7 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 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 38 Prepare the journal entries to record (a) the issuance of the note by Hilanten Plastics and (b) LAT Bank receivable on October 1, 2018 (If no entry is required for a transaction/event, select "No joumal entry required in the first account field. Inter your answers in whole dollars.) View transaction list Journal entry worksheet Record the issuance of the note by Banton Plastics Note Ester debits before credit Dar October 01, 2018 General Journal Dete r ede Record entry Clear entry View general journal Reg 2 >

Answer 1

Answers:

Required 1:

1.

Date	Account	Debit	Credit
Oct 1 2018	Cash	7,000,000
	Note Payable		7,000,000
To record issuance of Note by Blanton Plastics

2.

Date	Account	Debit	Credit
Oct 1 2018	Note receivable	7,000,000
	Cash		7,000,000
To record Note receivable by L&T Bank

Required 2:

Adjusting Entry:

Blanton Plastics

Date	Account	Debit	Credit
Dec 31 2018	Interest Expense	$262,500
	Interest Payable		$262,500
(To record interest accrued)

Calculation :

Interest Expense = $7,000,000*15%*3/12 = 262,500

L&T Bank

Date	Account	Debit	Credit
Dec 31 2018	Interest Receivable	$262,500
	Interest Revenue		$262,500
(To record interest accrued)

Calculation :

Interest Expense = $7,000,000*15%*3/12 = 262,500

Maturity

Blanton Plastics

Date	Account	Debit	Credit
Jan 31 2019	Interest Expense	$87,500
	Interest Payable	$262,500
	Note Payable	7,000,000
	Cash		$7,350,000
(To record interest and note payment)

Calculation :

Interest Expense = $7,000,000*15%*1/12 = 87,500

L&T Bank

Date	Account	Debit	Credit
Jan 31 2019	Cash	$7,350,000
	Interest Revenue		$87,500
	Interest Receivable		$262,500
	Note Payable		7,000,000
(To record interest and note payment)

Calculation :

Interest Revenue = $7,000,000*15%*1/12 = 87,500

Required 3a:

i.

Date	Account	Debit	Credit
Oct 1 2018	Cash	6,650,000
	Discount on Notes Payable	$350,000
	Note Payable		7,000,000
(To record issuance of Note)

Calculation :

Discount on Notes Payable = $7,000,000*15%*4/12 = 350,000

ii.

Date	Account	Debit	Credit
Dec 31 2018	Interest Expense	$262,500
	Discount on Note Payable		$262,500
(To record adjusting entry)

Calculation :

Discount on Notes Payable = $7,000,000*15%*3/12 = 262,500

iii.

Date	Account	Debit	Credit
Jan 31 2019	Interest Expense	$87,500
	Discount on Note Payable		$87,500
(To record interest expense)

Calculation :

Interest Expense = $7,000,000*15%*1/12 = 87,500

iv.

Date	Account	Debit	Credit
Jan 31 2019	Note Payable	7,000,000
	Cash		7,000,000
(To record payment of Note)

Required 3b:

Annual Effective Rate = 15.79%

Calculation:

Discount on Note Payable	(A)	$350,000
Cash Proceeds	(B)	6,650,000
Interest Rate for 4 Months	C = (A)/(B)	5.26%
Annual Effective Rate	5.26*12/4	15.79%