Question

Sheffield Corp. assigns $4400000 of its accounts receivables as collateral for a $3.00 million loan with a bank. The bank assesses a 2% finance charge on the loan amount and charges interest on the note at 7%. What would be the journal entry to record this transaction? Debit Cash for $2730000, debit Interest Expense for $270000, and credit Notes Payable for $3000000 Debit Cash for $1830200, debit Interest Expense for $60000, debit Due from Bank for $1400000, and credit Accounts Receivable for $4400000. Debit Cash for $2940000, debit Interest Expense for $60000, and credit Accounts Receivable for $3000000 Debit Cash for $2940000, debit Interest Expense for $60000, and credit Notes Payable for $3000000 (Ctrl) -

Answer 1

Sheffield Company

Solution

The entry to record the transaction is –

Account Titles and Explanation	Debit	Credit
Cash	$2,940,000
Interest Expense	$60,000
Notes Payable	$3,000,000
(To record issue of notes payable with 2% finance charge)

Explanation:

The notes payable is recorded at the loan amount taken from the bank.

The finance charge of 2% on 3,000,000 is recorded as interest expense.

Cash received from bank is reported as $3,000,000 – 60,000 = $2,940,000

The company gave the accounts receivable as collateral, but this does not involve any entry. However a note is provided as a disclosure in the balance sheet. Also the accounts receivable balance includes the amount pledged as collateral.

The 7% interest expense is recorded on accrual and on payment.