Question

On December 1, 2021, the Santa Teresa Glass Company borrowed $500,000 from Finance Bank and signed a promissory note. Interest at 12% is payable monthly. The company assigned $620,000 of its receivables as collateral for the loan. Finance Bank charges a finance fee equal to 1.5% of the accounts receivable assigned. What is the journal entry to record the finance arrangement?

Answer 1

The finance arrangement for the Santa Teresa Glass Company's loan includes debiting cash and finance fee expense, while crediting notes payable, interest payable, and accounts receivable assigned as collateral. The finance fee is 1.5% of the assigned receivables, or $9,300.

Step-by-step explanation:

The journal entry to record the finance arrangement for the Santa Teresa Glass Company's loan from Finance Bank would include recognizing the loan received, the interest payable, and the finance fee incurred due to assigning receivables as collateral. The finance fee is 1.5% of the $620,000 of assigned receivables, which amounts to $9,300. Therefore, the journal entry on December 1, 2021, would be:

• Debit Cash $500,000 (to record the cash received from the loan)
• Debit Finance Fee Expense $9,300 (to record the finance charge by the bank)
• Credit Notes Payable $500,000 (to record the obligation to repay the loan)
• Credit Interest Payable [Amount dependent on payment terms and timing]
• Credit Accounts Receivable Assigned as Collateral $620,000 (to show the collateral assignment)

Note: The exact amount for Interest Payable will be based on the first monthly payment period and can be calculated with the given 12% annual interest rate.