Question

Liability Financing = N ince Charge Iggy Co assigns $800,000 of its accounts receivable to LMU Bank as collateral fora AR: $600,000 note. Iggy Co continues to collect the accounts receivable; the account debtors <X1% are not notified of the arrangement. LMU Bank assesses a finance charge of 1% of the accounts receivable assigned and an interest on the note of 12%. Iggy Co makes monthly 000 - Notes payments to LMU Bank for all cash it collects on the receivable. *Liability Finance - Dou Assignment of accounts receivable and issuance of note on 3/1/2019 legy Co LMU Bank Dr. Cash 592.000 Dr. Notes Rec 600.000 Finance Charge 8,000 Cr. Interest Rev 8000 Cr. Liability Financing 6oo.ooo. Cash 592.000 Collection from accounts receivable of $400,000 less sales discounts of $8,000 in 3/2019 Iggy Co LMU Bank Dr. Cash 392,000 Sales Discount 8000 Cr. Accants Rec 400,000 No Entry

Answer 1

Assignment of accounts receivable is an agreement between a lending company and a borrowing company in which the later assigns its accounts receivable to the former in return for a loan. By assignment of accounts receivable, the lender gets a right to collect the receivables of the borrowing company if it fails to repay the loan in time. The lender also receives finance charges and service charges.

It is important to note that the receivables are not sold/transferred under an assignment agreement. If the receivables have been transferred, the agreement would be of sale/factoring of accounts receivable. Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

Entries in the books of Iggy Co. on 3/1:

1) Cash A/C Dr. $592,000.00

Finance Charges A/C Dr. $8,000.00

To Notes Payable A/C Cr. $600,000.00

2) Account Receivable Assigned A/C Dr. $800,000.00

To Account Receivable A/C Cr. $800,000.00

Entries in the books of LMU banks on 3/1:

Notes Receivables A/C Dr. $600,000.00

To Finance Charge A/C Cr. $8,000.00

To Cash A/C Cr. $592,000.00

On 3/31, we will pass below entries:

In the books of Iggy Co.:

Cash A/C Dr. $392,000.00

Sales Discount A/C Dr. $8,000.00

To Account Receivable Assigned A/C Cr. $400,000.00

In the books of LMU bank: No entry

Remittance of collection and accrued Interest:

In the books of Iggy Co.:

Note Payable A/C Dr. $392,000.00

Interest Expense A/C Dr. $6,000.00

To Cash A/C Cr. $398,000.00

Please note that I am assuming 12% interest is Annual.

In the books of LMU bank:

Cash A/C Dr. $398,000.00

To Interest Revenue Cr. $6,000.00

To Note Receivable Cr. $398,000.00