Required:

1. Prepare all journal entries from issuance to maturity for Stern Corporation.

2. Prepare all journal entries from issuance to maturity for Second State Bank.

Answer:

Requirement 1:

Stern Corporation
Issuance of note:
Cash	10,000,000
Notes payable		10,000,000
December 31, 2006 adjustment:
Interest expense*	333,333
Interest payable		333,333
March 1, 2007 maturity:
Interest expense**	166,667
Interest payable	333,333
Notes payable	10,000,000
Cash		10,500,000
*($10,000,000 x 10% x 4/12)
**($10,000,000 x 10% x 2/12)
Requirement 2:
Second State Bank
Issuance of note:
Notes receivable	10,000,000
Cash		10,000,000
December 31, 2006 adjustment:
Interest receivable*	333,333
Interest revenue		333,333
March 1, 2007 maturity:
Cash	10,500,000
Interest revenue**		166,667
Interest receivable		333,333
Notes receivable		10,000,000
*($10,000,000 x 10% x 4/12)
**($10,000,000 x 10% x 2/12)

Learning Objective: 2 Level of Learning: 3

126. Grossman Products began operations in 2006. The following selected transactions occurred from September 2006 through March 2007. Grossman's fiscal year ends on December 31.

2006:

1. On September 5, Grossman opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.

2. On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity.

3. Grossman received $3,000 of refundable deposits in December for reusable containers.

4. For the September through December period, sales totaled $5,000,000. The state sales tax rate is 4% and 75% of sales are subject to sales tax.

5. Grossman recorded accrued interest.

2007:

6. Grossman paid the promissory note on the March 1 due date.

7. Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months.