Blanton Plastics, a household plastic product manufacturer, borrowed $30 million cash on October 1, 2013, to provide working capital for year-end production. Blanton issued a four-month, 14% promissory note to L&T Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm’s fiscal period is the calendar year.
Required:
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, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
1-1 Record the issuance of the note by Blanton Plastics
1-2 Record the L&T Bank's receivable
2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
2-1 Record the adjusting entry for the Blanton Plastics
2-2 Record the adjusting entry for the L & T Bank
2-3 Record the maturity for the Blanton Plastics
2-4 Record the maturity for the L & T Bank
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 14% 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, 2013, the adjusting entry at December 31, and payment of the note at maturity. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
3-1 Record the issuance note
3-2 Record the adjusting entry
3-3 Record the interest expense
3-4 Record payment of the note payable
(b) What would be the effective interest rate? (Round your answer to 1 decimal place.)
* What is the Annual effective rate?