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.

3. Prepare the journal entries on September 30, 2019, to record payment of the notes payable at maturity.

Record the repayment of the note at maturity for Precision Castparts.-

-Record the receipt of cash at maturity for Midwest Bank.

Explanation / Answer

Solution:

Part 3(a) -- Record the repayment of the note at maturity for Precision Castparts

Date

General Journal

Debit

Credit

Sept.30, 2019

Notes Payable

$40,400,000

Interest Payable (40,400,000*9%*3 month / 12)

$909,000

Interest Expense (40,400,000*9%*9 months / 12)

$2,727,000

Cash

$44,036,000

Note --- Since year end on Dec 31…Precision Castparts recorded the interest expenses for 3 months (Oct to Dec) and Credit given wan Interest Payable, now at the time of maturity we will end that account interest payable and book the interest expense for remaining period 9 months.

Part 3(b) -- Record the receipt of cash at maturity for Midwest Bank

Date

General Journal

Debit

Credit

Sept.30, 2019

Cash

$44,036,000

      Interest Receivable(40,400,000*9%*3 month / 12)

$909,000

      Interest Revenue (40,400,000*9%*9 months / 12)

$2,727,000

    Investment in Short Term Notes (Par Value)

$40,400,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

General Journal

Debit

Credit

Sept.30, 2019

Notes Payable

$40,400,000

Interest Payable (40,400,000*9%*3 month / 12)

$909,000

Interest Expense (40,400,000*9%*9 months / 12)

$2,727,000

Cash

$44,036,000

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