Answer:
1. Prepare the journal entries to record (a) the issuance of the note by Blanton Plastics and (b) L&T Bank’s receivable on October 1, 2018.
a) October 1, 2018, loan obtained from L&T Bank
Dr Cash 28,000,000
Cr Notes payable 28,000,000
b) October 1, 2018, loan granted to Blanton Plastics
Dr Notes receivable 28,000,000
Cr Cash 28,000,000
2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019.
a) December 31, 2018, accrued interests on bank loan
Dr Interest expense 840,000
Cr Interest payable 840,000
January 31, 2019, loan is repaid
Dr Notes payable 28,000,000
Dr Interest payable 840,000
Dr Interest expense 280,000
Cr Cash 29,120,000
b) December 31, 2018, accrued interests on Blanton Plastics' loan
Dr Interest receivable 840,000
Cr Interest revenue 840,000
January 31, 2019, loan repaid by Blanton Plastics
Cr Cash 29,120,000
Cr Notes receivable 28,000,000
Cr Interest receivable 840,000
Cr Interest revenue 280,000
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 12% is the bank’s stated discount rate.
(a) Prepare the journal entries to record the issuance of the noninterest-bearing note by Blanton Plastics on October 1, 2018, the adjusting entry at December 31, and payment of the note at maturity.
October 1, 2018, loan obtained from L&T Bank
Dr Cash 28,000,000
Dr Discount on notes payable 1,120,000
Cr Notes payable 29,120,000
December 31, 2018, accrued interests on bank loan
Dr Interest expense 840,000
Cr Discount on notes payable 840,000
January 31, 2019, loan is repaid
Dr Notes payable 29,120,000
Dr Interest expense 280,000
Cr Cash 29,120,000
Cr Discount on notes payable 280,000
(b) What would be the effective interest rate?
effective interest rate = (1 + 12%/3)³ - 1 = 1.124864 - 1 = 0.124864 = 12.49%