Question

On April 1, 2020, Novak Company assigns $505,300 of its accounts receivable to the Third National Bank as collateral for a $327,200 loan due July 1, 2020. The assignment agreement calls for Novak to continue to collect the receivables. Third National Bank assesses a finance charge of 4% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).

Required:
a. Prepare the April 1, 2020, journal entry for Rasheed Company.
b. Prepare the journal entry for Rasheed’s collection of $364,000 of the accounts receivable during the period from April 1, 2014, through June 30, 2020.
c. On July 1, 2014, Rasheed paid Third National all that was due from the loan it secured on April 1, 2020. Prepare the journal entry to record this payment

Answer 1

A. Dr Cash 306,988

Dr Finance Charge 20,212

Cr Notes Payable $327,200

B. Dr Cash $364,000

Cr Accounts Receivable $364,000

C. Dr Notes Payable $327,200

Cr Interest Expense $8,180

Cr Cash $319,020

Step-by-step explanation:

A) Preparation of the April 1, 2020, journal entry for Prince Company.

Dr Cash 306,988

(327200-20212)

Dr Finance Charge 20,212

($505,300 x 4% = 20212)

Cr Notes Payable $327,200

B. Preparation of the journal entry for Rasheed’s collection

Dr Cash $364,000

Cr Accounts Receivable $364,000

C. Preparation of the journal entry to record this payment

Dr Notes Payable $327,200

Cr Interest Expense $8,180

(10% x $327,200 x 3/12 = 8180)

Cr Cash $319,020

($327,200-$8,180)