Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,080,000. Lonergan needs approximately $650,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

1. Borrow $650,000, 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.
2. Transfer $700,000 of specific receivables to the bank without recourse. The bank will charge a 3% factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met.

Required:
1. Prepare the journal entries that would be recorded on July 1 for:
    a. alternative a.
    b. alternative b.

2. Assuming that 90% of all June 30 receivables 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

1.

Alternative	Accounts titles and Explanation	Debit($)	Credit($)
a.	Cash a/c Dr	650,000
	To notes payable a/c		650,000
	(Being record of borrowing and signing of notes payable)
b.	Cash a/c Dr (700000-21000)	679,000
	Loss on transfer of receivables a/c Dr (700000x3%)	21,000
	To Accounts receivables a/c		700,000
	(Being record the transfer of receivables)

2.

Alternative	Accounts and titles explanation	Debit($)	Credit($)
a.	Cash a/c Dr (1080000x90%)	972,000
	To accounts receivable a/c		972,000
	(Being record the entry for cash collections)
a	Interest expense a/c Dr (650,000 x 12%/12)	6,500
	Note payable a/c Dr	650,000
	To cash a/c		656,500
	(Being record the entry of cash remittance to bank)
b	Cash a/c Dr (1,080,000 - 700,000) x 90%	342,000
	To accounts receivable a/c		342,000
	(Being record the entry for cash collections)