Question

13. 10.00 pons Lonergan Company occasionaly uses its accounts receivable to obtain immediate cash. At the end of June 2016, the company had accounts receivable of $1,160,000. Lonergan needs approximately $690,000 to capitalize on a unique investment opportunity On July 1, 2016, a local bank offlers Lonergan the following two alternatives a Borrow $690,000, 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 8% interest on the unpaid balance of the note at the beginning of the period. Transfer S 740,000 of specific receivables to the bank without recourse. The bank wil charge a 2% factoring tee on the amount of receivables transferred The bank will collect the receivables directly from customers. The sale ariteria are met b Required: 1. & 2. Prepare the journal entries that would be recorded for each of the altematives. (if no entry is required for a transaction/event, select "No joumal entry required" in the first account field.) Altemative a View transaction list Borrow $690,000, sign a note payable, and assign the entire receivable balance as collateral. 1 le Record the collection of receivables, assuming that 70% of all June 30 receivables are collected on July 31. 2 3 At the end of each month, a remittance will be made to the bank that equals the amount of receivables collected plus 8% interest on the unpaid balance of the note at the beginning of the period. Note:-journal entry has been entered xB G w oa WEEK 1 Chapt. Solved: Im
It’s all problem 13

Answer 1

Ans- Discounting of Receivables-Notes Payable Transactions

1- Alternative (a)-

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 1, 2016	Cash A/c Dr.	690,000
	Notes Payable A/c		690,000
	(To record the issuance of notes payable)
July 31, 2016	Cash A/c Dr.	812,000
	Accounts Receivable A/c		812,000
	(To record the collection from receivables)
July 31, 2016	Notes Payable A/c Dr.	690,000
	Interest Expense A/c Dr.	4,600
	Cash A/c		694,600
	(To record the collection from receivables)

Working Note:-

Calculate the amount of cash collected from accounts receivable:-

Cash Collection = 70% of Notes Receivable

=$1,160,000*70%

=$812,000   

Calculate the amount of interest expense:-

Interest= Principal* Rate of interest *Interest period

=$690,000*8/100*1/12

=$4,600

Alternative (b)-

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 1,2016	Cash A/c Dr.	725,200
	Loss on transfer of Notes Receivables A/c Dr.	14,800
	Notes Receivable A/c		740,000
	(To record the transfer of Notes receivable)
July 31,2016	Cash A/c Dr.	294,000
	Accounts Receivable A/c		294,000
	(To record the collection from receivables)

Working Note:-

Calculate the amount of loss on transfer of notes receivable:-

Loss on transfer of notes receivable= 2% of Notes Receivable

=$740,000*2/100

=$14,800

Calculate the amount of cash proceeds:-

Cash Proceeds= Face Value -Loss

=$740,000-$14,800

=$725,200

Calculate the amount of cash collected from accounts receivable:-

Cash Collection= 70% of Notes Receivable

=$420,000*70%

=$294,000

Notes Receivables= $1,160,000-$740,000

=$420,000