Question

Moon Inc. assigns $4,500,000 of its accounts receivables as collateral for a $3 million loan with a bank. The bank assesses a 3% finance charge on the loan amount and charges interest on the note at 6%. What would be the journal entry to record this transaction?

Answer 1

The journal entry to record the transaction includes debiting cash and finance charge expense, crediting accounts receivables and notes payable, and recording interest expense and interest payable.

Step-by-step explanation:

The journal entry to record the transaction would be as follows:

1. Debit: Cash (Loan Proceeds) - $3,000,000
2. Credit: Accounts Receivables (Collateral) - $4,500,000
3. Credit: Notes Payable (Loan) - $3,000,000
4. Debit: Finance Charge Expense - $90,000 (3% of $3,000,000)
5. Debit: Interest Expense - $180,000 (6% of $3,000,000)
6. Credit: Interest Payable - $180,000

The first two entries reflect the transfer of $3,000,000 in cash and the assignment of $4,500,000 in accounts receivables as collateral. The next entry records the loan amount as a liability. The remaining entries account for the finance charge and interest expense associated with the loan.