Question

On June 30, 2018, the High Five Surfboard Company had outstanding accounts receivable of $600,000. On July 1, 2018, the company borrowed $450,000 from the Equitable Finance Corporation and signed a promissory note.

Interest at 10% is payable monthly. The company assigned specific receivables totaling $600,000 as collateral for the loan. Equitable Finance charges a finance fee equal to 1.8% of the accounts receivable assigned.Required:
Prepare the journal entry to record the borrowing on the books of High Five Surfboard. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

The Journal entry is as follows:

On July 1,

Cash A/c Dr. $439,200

Finance charge Expense A/c Dr. $10,800

To Financing arrangement A/c $450,000

(To record the amount of borrowings)

Workings:

Finance charge expense = ($600,000 × 1.8%)

= $10,800

So, cash account = $450,000 - $10,800

= $439,200