Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.1 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 9% 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.

1. Record the necessary entry for the scenarios given above.
2. Record the adjustments on December 31, 2018.
3. Prepare the journal entries on September 30, 2019, to record payment of the notes payable at maturity.

Answer 1

1. Dr Cash $39.1 million

Cr Notes Payable $39.1 million

Dr Notes Receivable $39.1 million

Cr Cash $39.1 million

2. Dr Interest Expense $879,750

Cr Interest Payable $879,750

Dr Interest Receivable $879,750

Cr Interest Revenue $879,750

3. Journal entry for Precision Castparts

Dr Notes payable $39.1 million

Dr Interest expense $2,639,250

Dr Interest payable $879,750

Cr Cash $42,619,000

Journal entry for Midwest Bank

Dr Cash $42,619,000

Cr Notes receivable $39.1 million

Cr Interest receivable $879,750

Cr Interest revenue $2,639,250

Step-by-step explanation:

1. Preparation of the journal entry to Record the necessary entry for the scenarios given .

Dr Cash $39.1 million

Cr Notes Payable $39.1 million

Dr Notes Receivable $39.1 million

Cr Cash $39.1 million

2. Preparation of the journal entry to Record the adjustments on December 31, 2018.

Dr Interest Expense $879,750

Cr Interest Payable $879,750

(39.1 million*9%*3/12)

Dr Interest Receivable $879,750

Cr Interest Revenue $879,750

(39.1 million*9%*3/12)

3. Preparation of the journal entry on September 30, 2016, to record payment of the notes payable at maturity

Journal entry for Precision Castparts

Dr Notes payable $39.1 million

Dr Interest expense $2,639,250

($39.1 million*9%*9/12)

Dr Interest payable $879,750

(39.1 million*9%*3/12)

Cr Cash $42,619,000

($39.1 million+$2,639,250+$879,750)

Journal entry for Midwest Bank

Dr Cash $42,619,000

($39.1 million+$2,639,250+$879,750)

Cr Notes receivable $39.1 million

Cr Interest receivable $879,750

(39.1 million*9%*3/12)

Cr Interest revenue $2,639,250

($39.1 million*9%*9/12)