In: Accounting
Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $900,000. Lonergan needs approximately $560,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives: Borrow $560,000, 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. Transfer $610,000 of specific receivables to the bank without recourse. The bank will charge a 2% 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 80% 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.
Question 1
Journal entries:
Alternative a- Borrowed $560,000 from bank against receivables (as collateral)
Date | General journal | Debit | Credit |
07/01/2018 |
Bank a/c or cash a/c To Note payable a/c (Being money borrowed from the bank against account receivables) |
$560,000 |
$560,000 |
Alternative b: Factoring of specific receivables of amount $610,000 by bank (without recource)
Date | General journal | Debit | Credit |
07/01/2018 |
Bank a/c or cash a/c To Accounts receivables a/c (Being bank factored the specific receivables without recource) |
$610,000 |
$610,000 |
Question 2
Journal entries to record the collection and the remittance to the bank:
Alternative a
Date | General Journal | Debit | Credit |
July/2018 |
Bank a/c or cash a/c To Accounts receivable a/c (Being 80% of the Accounts receivables collected) ($900,000 x 80%) |
$720,000 |
$720,000 |
July/31/2018 |
Note payable a/c Interest a/c To Bank a/c or cash a/c (Being amount repaid to bank along with the interest) |
$560,000 $67,200 |
$627,200 |
Working note -Calculation of interest
Unpaid balance of note on July/01/2018 = $560,000
Interest payable at the end of the month i.e on july/31/2018 = $560,000 x 12% = $67,200
Alternative b
Date | General Journal | Debit | Credit |
July/2018 |
Factoring fee a/c To Bank a/c or cash a/c (Being factoring fee remitted to bank) ($610,000 x 2%) |
$12,200 |
$12,200 |
Note: Since specific receivables of amount $610,000 factored without recource by the bank, company don't need to make any remittances to the bank. Therefore there won't be any jounal entries for the same.
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