Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $940,000. Lonergan needs approximately $580,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

a.Borrow $580,000, 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 $630,000 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.

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

Particulars	Accounts Titles & Explanations	Debit	Credit
1.a
01-Jul	Cash	$580,000
	Notes Payable		$580,000
	(Notes payable collected)
1.b
01-Jul	Cash	617,400
	Loss on sale of receivables	12,600
	Accounts Receivables		$630,000
	(Remittance to bank)
2.a	Cash (940,000 x 90%)	846,000
	Notes Payable		846,000
	Interest Expense($580,000 x 12%x 1/12)	5,800
	Notes Payable	580,000
	Cash		585,800
2.b	Cash (940,000 -630,000)x 90%	$279000
	Accounts Receivable		$279000