Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide
Question:
Blanton Plastics, a household plastic product manufacturer, borrowed $14 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 noninterestbearing 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?
Step by Step Answer:
Requirement 1 Blanton Plastics Cash 14000000 Notes payable 14000000 L T Bank Notes receivable 14000000 Cash 14000000 Requirement 2 Adjusting entries December 31 2018 Blanton Plastics Interest expense 14000000 x 12 x 3 12 420000 Interest payable 420000 L T Bank Interest receivable 420000 Interest revenue 14000000 x 12 x 3 12 420000 Maturity January 31 2019 Blanton Plastics Interest expense 14000000 x 12 x 1 12 140000 Interest payable from adjusting entry 420000 Notes payable face amount 14000000 Cash total 14560000 L T Bank Cash total 14560000 Interest revenue 14000000 x 12 x 1 12 140000 Interest receivable from adjusting entry 420000 Notes receivable face amount 14000000 Requirement 3 a Issuance of note October 1 2018 Cash difference 13440000 Discount on notes payable 14000000 x 12 x 4 12 560000 Notes payable face amount 14000000 Adjusting entry December 31 2018 Interest expense 14000000 x 12 x 3 12 420000 Discount on notes payable 420000 Maturity January 31 2019 Interest expense 14000000 x 12 x 1 12 140000 Discount on notes payable 140000 ...View the full answer
Intermediate Accounting
ISBN: 9781259722660
9th Edition
Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
