Question

Azure Inc. assigns $4,000,000 of its accounts receivables as collateral for a $3 million loan with a bank. The bank assesses a 3% finance charge on the loan amount and charges interest on the note at 7%. What would be the journal entry to record this transaction?

Answer 1

Answer with its Explanation:

Step 1:

First of all record a loan of $3 million loan:

Dr Bank $3,000,000

Cr Loan      $3,000,000

Step 2:

Finance charge will be 3% on this loan amount:

Dr Finance Charge $3million *3% = $90,000

Cr                   Bank                                       $90,000

Step 3:

The interest on the note is 7% which is $70,000. So the journal entry would be:

Dr Interest Expense $70,000

Cr Interest payable                  $70,0000