Question

On 6/1/20, accounts receivable in the amount of $300,000 were assigned to the Perch Finance Company by Bass, Inc., as security for a loan of $250,000. The finance company charged a 5% commission on the face amount of the loan, and the note bears interest at 9%. Perch is to remit cash collected on the accounts, along with interest, at the end of each month until the note is repaid.

During the month of June, Bass received returns of $10,000 and collected $160,000 on the assigned accounts, after discounts of $3,000. In July, another $80,000 was collected, and another $40,000 was collected in August. At 8/31/20, Bass determined that no further collections would be made.

Required:

(a) Make all the entries required on Bass's books associated with the assignment of the accounts on 6/1/20.

(b) Make any entries required by Bass on 6/30, 7/31, and 8/31.

Please show work! Thank you in advance.

Answer 1

Date	Account Name	Debit	Credit
6.1.20	Account Receivable Pledged	$ 300,000
	Account Receivable		$ 300,000
6.1.20	Cash	$ 237,500
	Commission Expense	$   12,500
	Secured Loan @9%		$ 250,000
6.30.20	Sales Return/Inventory	$   10,000
	Account Receivable Pledged		$     10,000
6.30.20	Interest Expense	$     1,875
	Interest Payable		$       1,875
6.30.20	Restricted Cash	$ 160,000
	Discount on Account Receivable Pledged	$     3,000
	Account Receivable Pledged		$ 163,000
6.30.20	Secured Loan @9%	$ 158,125
	Interest Payable	$     1,875
	Restricted Cash		$ 160,000
7.31.20	Interest Expense	$        689
	Interest Payable		$          689
7.31.20	Restricted Cash	$   80,000
	Account Receivable Pledged		$     80,000
7.31.20	Secured Loan @9%	$   79,311
	Interest Payable	$        689
	Restricted Cash		$     80,000
8.31.20	Interest Expense	$           94
	Interest Payable		$            94
8.31.20	Restricted Cash	$   40,000
	Account Receivable Pledged		$     40,000
8.31.20	Secured Loan @9%	$   12,564
	Interest Payable	$           94
	Restricted Cash		$     12,658
8.31.20	Cash	$   27,342
	Restricted Cash		$     27,342
8.31.20	Account Receivable	$     7,000
	Account Receivable Pledged		$       7,000
8.31.20	Bad Debts	$     7,000
	Account Receivable		$       7,000

Working Notes

Date	Category	Calculation
6.1.20	Commission Expense	5%*250000
6.30.20	Interest Expense	9%*250000/12
7.31.20	Interest Expense	9%*(250000-158125)/12
8.31.20	Interest Expense	9%*(250000-158125-79311)/12

6.1.20	All the account receivables transferred to a new account named account receivable pledged
6.30.20	Any cash received from the account receivable is allocated under Restricted Cash till the time Secured Loan is paid
8.31.20	Any amount received in excess of the secured loan amount re-transferred back to Cash account i.e.27342
8.31.20	Rest of the account receivable pledged amount transferred back to account receivable account. Assumed the balance amount is uncollectible and hence expensed it as Bad Debts