Question

Problem 8-2A Record notes payable and notes receivable (LO2)

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Precision Castparts, a manufacturer of processed engine parts in the automotive and airline industries, borrows $40.6 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

1. Prepare the journal entries on October 1, 2015, to record the issuance of the note.

Journal entry for Precision Castparts

Dr Cash 40,600,000

Cr Notes payable 40,600,000

Journal entry for Midwest Bank

Dr Notes receivable 40,600,000

Cr Cash 40,600,000

2. Record the adjustment on December 31, 2015.

Journal entry for Precision Castparts

Dr Interest expense 812,000

Cr Interest payable 812,000

Journal entry for Midwest Bank

Dr Interest receivable 812,000

Cr Interest revenue 812,000

3. Prepare the journal entry on September 30, 2016, to record payment of the notes payable at maturity

Journal entry for Precision Castparts

Dr Notes payable 40,600,000

Dr Interest expense 2,436,000

Dr Interest payable 812,000

Cr Cash 43,848,000

Journal entry for Midwest Bank

Dr Cash 43,848,000

Cr Notes receivable 40,600,000

Cr Interest receivable 812,000

Cr Interest revenue 2,436,000