Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.8 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: a. Prepare the journal entries on October 1, 2012, to record (a) the notes payable for Precision Castparts and (b) the notes receivable for Midwest Bank. b. Record the adjustments on December 31, 2012, for (a) Precision Castparts and (b) Midwest Bank. c. Prepare the journal entries on September 30, 2013, to record payment of (a) the notes payable for Precision Castparts and (b) the notes receivable for Midwest Bank.

Answer 1

Answer:

A a) Journal Entry for Precision Castparts

Debit Bank $39.8 million Credit Note Payable $39.8 million

b) Journal Entry for Midwest bank

Debit Note Receivable $39.8 million Credit Bank $39.8 million

B a) Journal Entry for Precision Castparts

Debit Interest Expense $796,000 Credit Interest Payable $796,000

b)  Journal Entry for Midwest bank

Debit Interest Receivable $796,000 Credit Interest Income $796,000

C a) Journal Entry for Precision Castparts

Debit Note Payable $39.8 million Debit Interest Payable $796,000 Debit interest Expense $2,388,000 Credit Bank $42,984,000

b) Journal Entry for Midwest bank

Debit  Bank $42,984,000 Credit Note Receivable $39.8 million Credit Interest Receivable $796,000 Debit interest Income $2,388,000

Explanation:

Interest up to 31 Dec 2021

Interest = 39,800,000*8% = $3,184,000*3/12 =$796,000