Question

In: Accounting

Sheffield Corp. assigns $4560000 of its accounts receivables as collateral for a $3.13 million loan with...

Sheffield Corp. assigns $4560000 of its accounts receivables as collateral for a $3.13 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?

A. Debit Cash for $1875900, debit Interest Expense for $62600, debit Due from Bank for $1430000, and credit Accounts Receivable for $4560000.
B. Debit Cash for $3067400, debit Interest Expense for $62600, and credit Accounts Receivable for $3130000.
C. Debit Cash for $2848300, debit Interest Expense for $281700, and credit Notes Payable for $3130000.
D. Debit Cash for $3067400, debit Interest Expense for $62600, and credit Notes Payable for $3130000.

Solutions

Expert Solution

As the liability of Sheffield corp has increased with note payable of $3.13 million. The note payable will be credited with $3,130,000. Accounts receivable has been assigned as collateral with bank. The collateral of accounts receivable will not decrease the book value of accounts receivable. Therefore, there will be no effect on the book value of accounts receivable with this transaction. Finance charge on the loan is 2% which will be debited to interest expense and the balance amount of loan will be received in cash from bank.

Interest Expense = Loan Amount*2%

= $3,130,000*2% = $62,600

Journal Entry for the given transaction is shown as follows:- (Amounts in $)

Account Titles and Explanation Debit Credit
Cash (3,130,000-62,600) 3,067,400
Interest Expense 62,600
Notes Payable 3,130,000

Therefore the correct option is D. Debit Cash for $3067400, debit Interest Expense for $62600, and credit Notes Payable for $3130000.


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