Question

Sheridan Company assigns 4570000 of its accounts receivables as collateral for a2.94 million loan with a bank. The bank assesses a 2

1) Debit Cash for $2881200, debit Interest Expense for $58800, and credit Accounts Receivable for $2940000.
2) Debit Cash for $2076900, debit Interest Expense for $58800, debit Due from Bank for $1630000, and credit Accounts Receivable for $4570000.
3) Debit Cash for $2675400, debit Interest Expense for $264600, and credit Notes Payable for $2940000.
4) Debit Cash for $2881200, debit Interest Expense for $58800, and credit Notes Payable for $2940000.

Answer 1

The question is about how to record a bank loan in financial records with accounts receivable being used as collateral. A typical entry would involve debiting cash and interest expense while crediting accounts receivable or notes payable. The provided examples discuss how bank loans are recorded as assets by the lending bank and impact the receiving bank's balance sheet.

Step-by-step explanation:

The question at hand involves the process of recording a bank loan and the subsequent accounting entries that reflect this transaction within a company's financial records. Specifically, this scenario deals with the accounting treatment when a company assigns its accounts receivable as collateral for a loan. The correct journal entry to record the receipt of a loan and interest expense would typically debit Cash for the amount received, debit Interest Expense for the interest cost, and credit either Accounts Receivable (if control is transferred) or Notes Payable (more commonly) for the full amount of the loan.

Based on the given information, it is not immediately clear which option is correct, and the question appears to be incomplete or may contain errors. However, using similar examples, we can glean that when Singleton Bank offers a loan to Hank's Auto Supply, Singleton Bank will record this loan as an asset on its balance sheet because it expects to generate interest income. When Hank deposits this money, the deposits and reserves of the First National rise accordingly. First National is thereafter required to maintain a 10% reserve on the increased deposits but is free to loan out the remaining balance.