Question

On April 1, 2014, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2014. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% per annum(a realistic rate of interest for a note of this type).(a) Prepare the April 1, 2012, journal entry for Prince Company
(b) Prepare the journal entry for Prince

Answer 1

Answer:

Explanation:

The journal entries are shown below:

a) April 1, 2012;

Dr Cash A/C. $290,000

Dr finance charge $10,000

Cr payable $300,000

($500,000 × 2% = $10,000)

b)

Dr Cash A/c $350,000

Cr Account receivable $350,000

c)

Dr payable $300,000

Dr interest expense $7,500

Cr Cash $307,500

(10% × $300,000 × 3/12 = $7,500)