Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $880,000. Lonergan needs approximately $540,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives:

1. Borrow $540,000, 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 9% interest on the unpaid balance of the note at the beginning of the period.
2. Transfer $600,000 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:

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

2. Journal entries to record the collection and the remittance to the bank

a) alternative a

Date	General Journal	Debit	Credit
July 2018	Cash	$792,000
	Accounts Receivable (90% of $880,000)		$792,000
31 july 2018	Interest Expenses [($540,000 x 9%) x (1 month/12 month)]	$4,050
	Notes Payable (Borrowed in June end)	$540,000
	Cash		$544,050
	(To Record the payment to Bank against amount borrowed ($540,000) along with Interest on it for july Month)

  b. alternative b.

Date	General Journal	Debit	Credit
31 July 2018	Cash	$252,000
	Accounts Receivable - 90% of ($880,000 - $600,000)		$252,000
	(To record the collection of remaining Accounts Receivable after Transfer $600,000 of specific receivables to the bank without recourse)