Question

A note payable was executed by Sterling Inc. and sent to Miami Finance Company. Sterling Inc. used $120,000 of its accounts receivable as collateral for the loan. The contract provided that Miami would advance 85% of the gross amount of the receivables. Sterling Inc. continues to collect payments for the receivables, and the cash from customers is then remitted to the finance company. The cash remitted is first applied to the finance charges, with the remainder applied to principal.

During the first month, customers owing $82,000 paid cash, less sales returns and allowances of $3,200, originally recorded as a refund liability. The finance charge at the end of the first month was $700.
During the second month, the remaining receivables were collected in full, except for $800 written off as uncollectible. Final settlement was effected with the finance company, including payment of an additional finance charge of $300.
Required
Record the entry for Sterling to record the secured borrowing.

Answer 1

Sterling Inc. records the initial borrowing from Miami Finance Company by debiting cash for $102,000 (85% of $120,000) and crediting notes payable for the same amount to reflect the loan advanced using accounts receivable as collateral.

Step-by-step explanation:

The student is seeking to understand how to record a secured borrowing transaction in an accounting context.

Initial Borrowing Entry

Sterling Inc. has made an arrangement where $120,000 of its accounts receivable serve as collateral for a loan from Miami Finance Company. Miami Finance Company agrees to advance 85% of the gross amount of these receivables. Upon execution of the note payable, the entry that Sterling should record in its books to reflect this borrowing would be a debit to Cash and a credit to Notes Payable for the amount advanced by Miami Finance.

Here is the journal entry Sterling Inc. should make:

• Debit Cash: $120,000 × 85% = $102,000
• Credit Notes Payable: $102,000

This reflects the cash Sterling Inc. receives and the obligation to pay back to Miami Finance Company. Over the course of the loan, Sterling Inc. will need to make additional entries for cash collections, finance charges, and any adjustments for returns, allowances, or uncollectible accounts.