Precision Castparts, a manufacturer of processed engine parts in the automotive

Question

Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $40.4 million cash on October 1, 2018, to provide working capital for anticipated expansion. Precision signs a one-year, 9% 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, 2018, to record the issuance of the note. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars, not in millions (i.e., $5.5 million should be entered as 5,500,000).)

2. Record the adjustments on December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars, not in millions (i.e., $5.5 million should be entered as 5,500,000).)

3. Prepare the journal entries on September 30, 2019, to record payment of the notes payable at maturity. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars, not in millions (i.e., $5.5 million should be entered as 5,500,000).)

Notes:(important)

1. How to record the acceptance of the note by Midwest Bank. (requirement #1) ?

2. How to record the adjustment for interest for Midwest Bank. (requirement #2) ?

3.How to record the receipt of cash at maturity for Midwest Bank. (requirement #3) ?

Explanation / Answer

Solution:-

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Event Date Account titles and explanation Debit Credit 1 Oct. 1, 2018 Cash 40,400,000 Notes payable 40,400,000 #1 Oct. 1, 2018 Notes receivable 40,400,000 Cash 40,400,000 2 Dec. 31, 2018 Interest expense (40,400,000 * 9% * 3/12) 909,000 Interest payable 909,000 (to accrue interest for 3 mths ) #2 Dec. 31, 2018 Interest receivable 909,000 Interest revenue 909,000 3 Sep. 30, 2019 Notes payable 40,400,000 Interest expense (40,400,000 * 9% * 9/12) 2,727,000 Interest payable 909,000 Cash 44,036,000 #3 Sep. 30, 2019 Cash 44,036,000 Notes receivable 40,400,000 Interest revenue 2,727,000 Interest receivable 909,000

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