Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $920,000. Lonergan needs approximately $570,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

A. Borrow $570,000, sign a note payable, and assign the entire receivable balance as collateral. At the end of each month, a remittance will be made to the bank that equals the amount of receivables collected plus 10% interest on the unpaid balance of the note at the beginning of the period.
B. Transfer $620,000 of specific receivables to the bank without recourse. The bank will charge a 3% factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met.
Required:
1. Prepare the journal entries that would be recorded on July 1 for:
a. alternative a.
b. alternative b.
2. Assuming that 70% of all June 30 receivables are collected during July, prepare the necessary journal entries to record the collection and the remittance to the bank for:____.
a. alternative a.
b. alternative b.

Answer 1

1.

ALTERNATIVE A

01-Jul

Dr Cash $570,000

Cr Notes Payable $570,000

ALTERNATIVE B

01-Jul

Dr Cash 601,400

Dr Loss on sale of receivables $18,600

Cr Accounts Receivables $620,000

2.

ALTERNATIVE A

Dr Cash $644,000

Cr Notes Payable $644,000

Dr Interest Expense $4,750

Dr Notes Payable 570,000

Cr Cash 574,750

ALTERNATIVE B

Dr Cash $210,000

Cr Accounts Receivable $210,000

Step-by-step explanation:

1. Preparation of the journal entries that would be recorded on July 1 for alternative a and

alternative b.

ALTERNATIVE A

01-Jul

Dr Cash $570,000

Cr Notes Payable $570,000

(Notes payable collected)

ALTERNATIVE B

01-Jul

Dr Cash 601,400

($620,000-$18,600)

Dr Loss on sale of receivables $18,600 (3%*$620,000)

Cr Accounts Receivables $620,000

(Remittance to bank)

2. Preparation of the necessary journal entries to record the collection and the remittance to the bank for alternative a and

alternative b.

ALTERNATIVE A

Dr Cash (920,000 x 70%) $644,000

Cr Notes Payable $644,000

Dr nterest Expense($570,000 x 10%x 1/12) $4,750

Dr Notes Payable 570,000

Cr Cash 574,750

($570,000+$4,750)

ALTERNATIVE B

Dr Cash [ (920,000 -620,000)x 70%] $210,000

Cr Accounts Receivable $210,000