Question

Lonergan Company occasionally uses Its accounts receivable to obtain Immedlate cash. At the end of June 2021, the company had accounts recelvable of $1,140.000. Lonergan needs approximately $680,000 to capitalize on a unique Investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives: a. Borrow $680,000, sign a note payable, and assign the entire recevable 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 unpald balance of the note at the beginning of the period. b. Transfer $730,000 of specific receivables to the bank wthout recourse. The bank will charge a 3% factoring fee on the amount of recelvables transferred. The bank will collect the recelvables directly from customers. The sale criteria are met. Required: 1. Prepare the journal entries that would be recorded on July 1for: a. alternative a. b. alternative b. 2. Assuming that 80 % of all June 30 recelvables 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
Date	Accounts titles and Explanation	Debit ($)	Credit ($)
	Alternative A
Jul-01	Cash	6,80,000
	Notes payable		6,80,000
	(To record amount borrowed)
	Alternative B
Jul-01	Cash	7,08,100
	Loss on transfer of receivables (730,000*3%)	21,900
	Accounts receivable		7,30,000
	(To record transfer of accounts receivable)
2
Date	Accounts titles and Explanation	Debit ($)	Credit ($)
	Alternative A
Jul-01	Cash	9,12,000
	Accounts receivable (1,140,000*80%)		9,12,000
	(To record collection of accounts receivable)
Jul-31	Interest expense (680,000*12%*1/12)	6,800
	Notes payable	6,80,000
	Cash		6,86,800
	(To record payment to bank against amount borrowed along with interest)
	Alternative B
Jul-31	Cash	3,28,000
	Accounts receivable [(1,140,000-730,000)*80%]		3,28,000
	(To record collection of remaining accounts receivable)