Question

Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2016, 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, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Answer 1

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Requirement 1
Blanton Plastics
Cash	$    14,000,000
Notes Payable		$    14,000,000
L & T Bank
Notes receivable	$    14,000,000
Cash		$    14,000,000
Requirement 2
Adjusting entries (December 31, 2016)
Blanton Plastics
Interest expense ($14,000,000 x 12% x 3/12)	$          420,000
Interest Payable		$          420,000
L & T Bank
Interest receivable	$          420,000
Interest revenue ($14,000,000 x 12% x 3/12)		$          420,000
Maturity (January 31, 2017)
Blanton Plastics
Interest expense ($14,000,000 x 12% x 1/12)	$          140,000
Interest payable (from adjusting entry)	$          420,000
Notes payable	$    14,000,000
Cash		$    14,560,000
L & T Bank
Cash	$    14,560,000
Interest revenue ($14,000,000 x 12% x 1/12)		$          140,000
Interest receivable (from adjusting entry)		$          420,000
Notes receivable		$    14,000,000
Requirement 3
a.
Issuance of note (October 1, 2016)
Cash	$    13,440,000
Discount on notes payable ($14,000,000 x 12% x 4/12)	$          560,000
Notes payable		$    14,000,000
Adjusting entry (December 31, 2016)
Interest expense ($14,000,000 x 12% x 3/12)	$          420,000
Discount on notes payable		$          420,000
Maturity (January 31, 2019)
Interest expense ($14,000,000 x 12% x 1/12)	$          140,000
Discount on notes payable		$          140,000
Notes payable	$    14,000,000
Cash		$    14,000,000
b.
Effective interest rate:
Discount ($14,000,000 x 12% x 4/12)	a	$          560,000
Cash proceeds	b	$    13,440,000
Interest rate for four months	a/b	4.1667%
		x 12/4
Annual effective rate		12.50%