Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.4 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.

Required:
a. Prepare the journal entries on October 1, 2021, to record the issuance of the note.
b. Record the adjustments on December 31, 2021.
c. Prepare the journal entries on September 30, 2021, to record payment of the notes payable at maturity.

Answer 1

a. Precision Castparts

Dr Cash $39.4 million

Cr Notes Payable $39.4 million

Midwest Bank

Dr Notes Receivable $39.4 million

Cr Cash $39.4 million

b. Precision Castparts

Dr Interest expense $886,500

Cr Interest payable $886,500

Midwest Bank

Dr Interest receivable $886,500

Cr Interest revenue $886,500

c. Precision Castparts

Dr Notes payable $39.4 million

Dr Interest expense $2,659,500

Dr Interest payable $886,500

Cr Cash $42,946,000

Midwest Bank

Dr Cash $42,946,000

Cr Notes receivable $39.4 million

Cr Interest revenue $2,659,500

Cr Interest receivable $886,500

Explanation:

a. Preparation of the journal entries on October 1, 2021, to record the issuance of the note.

Precision Castparts

Dr Cash $39.4 million

Cr Notes Payable $39.4 million

Midwest Bank

Dr Notes Receivable $39.4 million

Cr Cash $39.4 million

b. Preparation of the journal entry to Record the adjustments on December 31, 2021.

Precision Castparts

Dr Interest expense $886,500 ($39.4 million x 9% x 3/12)

Cr Interest payable $886,500

Midwest Bank

Dr Interest receivable $886,500

Cr Interest revenue $886,500

($39.4 million x 9% x 3/12)

c. Preparation of the journal entries on September 30, 2021, to record payment of the notes payable at maturity.

Precision Castparts

Dr Notes payable $39.4 million

Dr Interest expense $2,659,500($39.4 million x 9% x 9/12)

Dr Interest payable $886,500

($39.4 million x 9% x 3/12)

Cr Cash $42,946,000

($39.4 million+$2,659,500+$886,500)

Midwest Bank

Dr Cash $42,946,000

($39.4 million+$2,659,500+$886,500)

Cr Notes receivable $39.4 million

Cr Interest revenue $2,659,500($39.4 million x 9% x 9/12)

Cr Interest receivable $886,500

($39.4 million x 9% x 3/12)