Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $40.3 million cash on October 1, 2021, to provide working capital for anticipated expansion. Precision signs a one-year, 8% 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

The journal entry to record the issuance of the promissory note:

October 1, 2021, loan obtained from Midwest Bank

Dr Cash 40,300,000

Cr Notes payable 40,300,000

By December 31, 2021, interests will have accrued. Assuming a 365 day year, accrued interest for 3 months = $40,300,000 x 8% x 82/365 = $724,295.89

December 31, 2021, accrued interest on bank loan

Dr Interest expense 724,295.89

Cr Interest payable 724,295.89