Question

The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal year ends on December 31. 2018 Jan. 13 Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $25.0 million at the bank’s prime rate. Feb. 1 Arranged a three-month bank loan of $4.2 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 14% was payable at maturity. May 1 Paid the 14% note at maturity. Dec. 1 Supported by the credit line, issued $15.9 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 13% discount rate. 31 Recorded any necessary adjusting entry(s). 2019 Sept. 1 Paid the commercial paper at maturity.

Answer 1

SOLUTION

Date	Accounts title and Explanation	Debit ($)	Credit ($)
2018
Jan.13	No Entry
Feb. 1	Cash	4,200,000
	Notes Payable		4,200,000
May 1	Interest expense ($4,200,000 * 14% * 3/12)	147,000
	Notes payable	4,200,000
	Cash		4,347,000
Dec.1	Cash	14,349,750
	Discount on notes payable ($15,900,000 *13%*9/12)	1,550,250
	Notes payable		15,900,000
Dec.31	Interest Expense ($15,900,000*13%*1/12)	172,250
	Discount on note		172,250
2019
Sept.1	Interest expense ($15,900,000*13%*8/12)	1,378,000
	Discount on notes payable		1,378,000
	Notes payable	15,900,000
	Cash		15,900,000