Question

On April 1, 2020, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2020. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a fi nance charge of 2% 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 $350,000 of the accounts receivable during the period from April 1, 2014, through June 30, 2020.
c. On July 1, 2020, 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

1. Dr Cash 192,000

Dr Finance charge 8,000

Cr Notes payable 200,000

2. Dr Cash 350,000

Cr Accounts receivable 350,000

3. Dr Notes payable 200,000

Dr Interest expense 5,000

Cr Cash 205,000

Step-by-step explanation:

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

Dr Cash 192,000

(200,000-8,000)

Dr Finance charge 8,000

(2%*400,000)

Cr Notes payable 200,000

B. Preparation of the journal entry for Rasheed's collection of the amount of $350,000 of the accounts receivable

Dr Cash 350,000

Cr Accounts receivable 350,000

C) Preparation of the journal entry to record all the amount that was due from the loan it secured on April 1, 2020

Dr Notes payable 200,000

Dr Interest expense 5,000

(10%*$200,000*3/12)

Cr Cash 205,000

(200,000+5,000)