Check Lonergan Company occasionally uses its accounts receivable to obtain immed
ID: 2413856 • Letter: C
Question
Check Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $780,000. Lonergan needs approximately $500,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives: a. Borrow $500,000, 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. b. Transfer $550,000 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. Assuming that 80% of all June 30 receivables are collected during July, prepare the necessary journal entries to record the a. alternative a collection and the remittance to the bank for: b. alternative bExplanation / Answer
For the first alternative disclosure which is required in the footnotes has an arrangement with the bank that provides $500000 at 12%interest. Here the accounts received are assigned as a collateral.
For the second alternative $550000 of specific receivable are assigned to the bank without any recourse
At 2%factoring fees
Date Title of the account Dr Cr 1-jul Cash $500,000 Option A Payable notes $500,000 Option B Cash (55000*98%) 539000 Loss on transfer of the receivable 11000 Receivable accounts $550,000 Ans 2 Option A Cash 624000 Receivable accounts(780000*80%) 624000 Interest expenses(500000*12%*1/12) 5000 Payable notes 500000