Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $40.2 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 7% promissory note to Midwest Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year-end.

Required:
a. Prepare the journal entries on October 1, 2021, to record (a) the notes payable for Precision Castparts and (b) the notes receivable for Midwest Bank.
2. Record the adjustments on December 31, 2021, for (a) Precision Castparts and (b) Midwest Bank.
3. Prepare the journal entries on September 30, 2021, to record payment of (a) the notes payable for Precision Castparts and (b) the notes receivable for Midwest Bank.

Answer 1

a. Prepare the journal entries on October 1, 2021, to record (a) the notes payable for Precision Castparts

Dr Cash 40,200,000

Cr Notes payable 40,200,000

and (b) the notes receivable for Midwest Bank.

Dr Notes receivable 40,200,000

Cr Cash 40,200,000

2. Record the adjustments on December 31, 2021, for (a) Precision Castparts and

Dr Interest expense 703,500

Cr Interest payable 703,500

(b) Midwest Bank.

Dr Interest receivable 703,500

Cr Interest revenue 703,500

3. Prepare the journal entries on September 30, 2021, to record payment of (a) the notes payable for Precision Castparts and

Dr Interest expense 2,110,500

Dr Notes payable 40,200,000

Dr Interest payable 703,500

Cr Cash 43,014,000

(b) the notes receivable for Midwest Bank.

Dr Cash 43,014,000

Cr Interest revenue 2,110,500

Cr Notes receivable 40,200,000

Cr Interest receivable 703,500