Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39 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: 1. Prepare the journal entries on October 1, 2021, to record the issuance of the note.

Answer 1

Answer and Explanation:

Precision Castparts General Journal

October 01,2021

Dr Cash 39,000,000

Cr Notes payable 39,000,000

December 31 2021

Dr Interest expense 682,500

($39,000,000×7%)/12×3

Cr Interest payable 682,500

September 30 2022

Dr Interest expense 2,047,500

(39,000,000×7%)/12×9

Dr Interest payable 682,500

Dr Note Payable 39,000,000

Cr Cash 41,730,000

Midwest Bank General Journal

Dr Note receivable 39,000,000

Cr Cash 39,000,000

December 31 2021

Dr Interest receivable 682,500

($39,000,000×7%)/12×3

Cr Interest income 682,500

September 30 2022

Dr Cash 41,730,000

Cr Interest receivable 2,047,500

(39,000,000×7%)/12×9

Cr Interest income 682,500

Cr Note receivable 39,000,000