Question

Jada Co. (borrower) borrows $100,000 on January 1 from NorthEast Bank (lender) at a 12% interest rate. Jada assigned $140,000 (AR Face Value) of its accounts receivable as collateral, and agreed to pay a financing fee of 2% (2% of AR) of accounts receivable assigned. On January 1, Jada's accounting for this transaction will include:

a. Debit to cash for $100,000.
b. Debit to cash for $97,200.
c. Debit to finance expense of $2,000.
d. Debit to finance expense of $1,000.

Answer 1

The correct accounting entries for Jada Co. include a debit to cash for $97,200 and a debit to finance expense for $2,800, reflecting the borrowed amount minus the financing fee based on the assigned accounts receivable.

Step-by-step explanation:

On January 1, when Jada Co. borrows $100,000 from NorthEast Bank and assigns $140,000 of its accounts receivable as collateral with a financing fee of 2%, Jada Co.'s accounting entries would reflect the borrowing and the financing fee. The correct entries would include a debit to cash for the amount received minus the financing fee, and a debit to finance expense for the amount of the financing fee.

Given the financing fee is 2% of the assigned accounts receivable ($140,000), the finance fee would amount to $2,800 (2% of $140,000). Therefore, the entry is a debit to cash for $97,200 ($100,000 - $2,800) and a debit to finance expense for $2,800, not $2,000 or $1,000.