Prearranged short-term line of credit

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Reference no: EM13822959

Hot Springs Marine borrowed $20 million cash on December 1, 2011, to provide working capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to Third 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 Hot Springs Marine and (b) THird Bank's receivable on December 1, 2011.

2. Prepare the journal entires by both firms to record all subsequent events related to the note through March 31, 2012.

3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entires to record the issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2011. What would be the effective interest rate?

Please complete and show all work.

Reference no: EM13822959

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