[The following information applies to the questions displayed below.] Precision
ID: 2582838 • Letter: #
Question
[The following information applies to the questions displayed below.]
Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $39.3 million cash on October 1, 2018, to provide working capital for anticipated expansion. Precision signs a one-year, 7% 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.
2.
value:
5.88 points
Required information
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).)
References
eBook & Resources
General JournalDifficulty: 3 HardLearning Objective: 08-02 Account for notes payable and interest expense.
Check my work
3.
value:
5.88 points
Required information
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).)
References
eBook & Resources
General JournalDifficulty: 3 HardLearning Objective: 08-02 Account for notes payable and interest expense.
Check my work
4.
value:
5.88 points
Required information
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).)
Explanation / Answer
Journal entries in Books of Precision CastParts
Transaction
Date
Account Name
Description
Debit (In $ )
Credit (In $)
1
October 1, 2018
Cash
Issuance of notes for borrowing cash
39,300,000
October 1, 2018
Notes Payable
Issuance of notes for borrowing cash
39,300,000
*2
December 31, 2018
Interest Expense
Interest accrued for 3 months
687,750
December 31, 2018
Interest Payable
Interest accrued for 3 months
687,750
**3
September 30, 2019
Notes Payable
Payment of notes payable
39,300,000
September 30, 2019
Interest Expense (9 months)
Payment of notes payable
2,063,250
September 30, 2019
Interest Payable (3 months)
Payment of notes payable
687,750
September 30, 2019
Cash
Payment of notes payable
42,051,000
*This transaction is recorded on 31st December 2018, which is the closing or year-end date.
So, in this interest expense is calculated for 3 months (From 1st October 2018 to 31st December 2018) which is $ 687,750. Because only this amount belongs to this year, Interest expense is Debit in the journal entry.
But, this amount is not yet paid nor due, so Interest Payable is Credit in the journal entry.
Calculation of 3 months Interest on Notes payable:
= Amount of notes payable X Rate of interest X Time period
= $ 39,300,000 X 7/100 X 3/12
= $ 687,750
**This transaction is recorded on 30th September 2019, which is the maturity date of notes payable.
So, in this interest expense is calculated for 9 months (From 1st January 2019 to 30th September 2019) which is $ 2,063,250. Because this amount belongs to this year, Interest expense is Debit in the journal entry with this amount.
Interest Payable belonging to last periods (that is of 3 months, from 1st October 2018 to 31st December 2018) is now due and paid, because of maturity. So Interest Payable is debit in the journal entry.
Calculation of 9 months Interest on Notes payable:
= Face Value X Rate of interest X Time period
= $ 39,300,000 X 7/100 X 9/12
= $ 2,063,250
Total Amount paid on maturity of notes payable
= Face Value + Interest
= $ 39,300,000 + ($ 687,750 + $ 2,063,250)
= $ 42,051,000
Transaction
Date
Account Name
Description
Debit (In $ )
Credit (In $)
1
October 1, 2018
Cash
Issuance of notes for borrowing cash
39,300,000
October 1, 2018
Notes Payable
Issuance of notes for borrowing cash
39,300,000
*2
December 31, 2018
Interest Expense
Interest accrued for 3 months
687,750
December 31, 2018
Interest Payable
Interest accrued for 3 months
687,750
**3
September 30, 2019
Notes Payable
Payment of notes payable
39,300,000
September 30, 2019
Interest Expense (9 months)
Payment of notes payable
2,063,250
September 30, 2019
Interest Payable (3 months)
Payment of notes payable
687,750
September 30, 2019
Cash
Payment of notes payable
42,051,000
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