Question

Chapter 7- Problem 4, 6,7, 8 Due 5-1-19 t References Mailings Review View Help Tell me what you want to do ,A--. ||1Norrmall1NoSpac ρ. 스, Heading 1 Heading 2 Title Paragraph Styles P 7-7 Factoring versus assigning of accounts receivable (2 Points) Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $780,ooo. Lonergan needs approximately $500,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives: a. Borrow s500,000, 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 $550,000 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 eustomers. The sale criteria are met. Required 1. Prepare the journal entries that would be recorded on July 1 for each of the alternatives 2. Assuming that 80% of all June 30 receivables are collected during July, prepare the necessary journal entries to record the collection and the remittance to the bank. 3. For each alternative, explain any required note disclosures that woul included in the July 31, 2018, financial statements. 2 Points) -8 Factoring of accounts receivable; without recourse (

Answer 1

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Requirement 1
Alternative a:
Date	Account	Debit	Credit
July 1, 2018	Cash	$                  500,000
	Note Payable		$             500,000
	To record the borrowing of $500,000 and signing of a note payable.
Alternative b:
July 1, 2018	Cash ($550,000 x 98%)	$                  539,000
	Loss on transfer of receivables (2% x $550,000)	$                    11,000
	Accounts receivable		$             550,000
	To record the transfer of receivables.
Requirement 2
Alternative a:
July 1, 2018	Cash (80% x $780,000)	$                  624,000
	Accounts receivable		$             624,000
July 31, 2018	Interest expense ($500,000 x 12% x 1/12)	$                      5,000
	Note payable	$                  500,000
	Cash		$             505,000
Alternative b:
July 31, 2018	Cash [80% x ($780,000 - $550,000)]	$                  184,000
	Accounts receivable		$             184,000
Requirement 3
Alternative a. –	Note disclosure is required for the assignment of accounts
	receivable as collateral for the $500,000 note.
Alternative b. –	No disclosure is required since the transfer of receivables
	was made without recourse.