Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $1,120,000. Lonergan needs approximately $660,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives:
a. Borrow $660,000, sign a note payable, and assign the entire receivable balance as collateral. At the end of each month,a remittance will be made to the bank that equals the amount of receivables collected plus 10% interest on the unpaid balance of the note at the beginning of the period.

b. Transfer $720,000 of specific receivables to the bank without recourse. The bank will charge a 2% factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met.

Prepare the journal entries that would be recorded on July 1 for
a. alternative a
b. alternative b.

Answer 1

Explanation:

The Journal Entry is shown below:-

a. Cash Account Dr,                                $660,000

            To Notes payable                                       $660,000

(Being amount borrowed is recorded)

b. Cash Dr,                                                $705,600

    Loss on transfer of receivable Dr,      $14,400

              To Accounts receivable                            $720,000

(Being transfer of accounts receivable is recorded)