Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.2 million cash on October 1,2015, 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.1.Prepare the journal entries on October 1, 2015, to record the issuance of the note.
2.Record the adjustment on December 31, 2015.
3.Prepare the journal entry on September 30, 2016, to record payment of the notes payable at maturity

Answer 1

Answer:

1) October 1 2015,   Cash                           $39.2million Dr

                                   Notes Payable             $39.2million Cr

2) December 31, 2015   Interest expense         $0.784million Dr

                                          Interest Payable           $0.784million Cr

3) September 30, 2016 Notes Payable       $39.2million Dr

                                        Interest Payable     $0.784million Dr

                                        Interest Expense    $2.352million Dr

                                                 Cash                         $42.336million Cr

Explanation:

1.

When note is issued, liability is credit by the notes value and cash is credited.

2.

The adjusting entry is prepared 3 months after the note is issued so the 3 month's interest on note relates to 2015 and it should be recorded as expense and as it is payable at maturity so interest payable is credited.

3 month interest = 39.2 * 0.08 * 3/12 = 0.784million

3.

The note and interest will be payable that was accrued along with the remaining 9 months interest. Total interest is 39.2 * 0.08 = 3.136million