Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,040,000. Lonergan needs approximately $630,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

a. Borrow $630,000, 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 12 %interest on the unpaid balance of the note at the beginning of the period.

b. Transfer $680,000 of specific receivables to the bank without recourse. The bank will charge a 4 %factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met.

Required:

1. Prepare the journal entries that would be recorded on July 1 for:

a. alternative a.

b. alternative b.

2. Assuming that 90 %of all June 30 receivables are collected during July, prepare the necessary journal entries to record the collection and the remittance to the bank for:

a. alternative a.

b. alternative b.

Answer 1

Answer 1 Alternative a Date July, 1 2021 | Credit Debit $630,000 General Journal Cash Note Payable (To record the amount borrowed through note payable) $630,000 Alternative b July, 1 2021 $652,800 $27,200 Cash ($680,000 X (100% -4%)] Loss on Transfer of Receivables ($680,000 x 4%) Accounts Receivable (To record the transfer of specific receivables) $680,000

2 Alternative a Date July, 1 2021 Credit Debit $936,000 General Journal Cash ($1,040,000 x 90%) Accounts Receivable (To record the amount received) $936,000 $6,300 $630,000 July, 31 2021 Interest Expense ($630,000 x 12% x 1/12) Note Payable Cash To record the Interest expanses) $636,300 $324,000 Alternative b July, 31 2021 Cash (See Explanations) Accounts Receivable (To record the amount received) $324,000 Explanations 2 - Alternative b Accounts Receivable are now held by Bank Presumably the bank has collected during July (90% x 680,000) Lonergan still holds accounts receivable ($1,040,000 - $680,000) Lonergan should have collected during July ($360,000 x 90%) $680,000 $612,000 $360,000 $324,000 July, 31 2021 Cash [90% x ($1,040,000 - $680,000)] $324,000