Question

On April 1, 2020, Wildhorse Company assigns $539,700 of its accounts receivable to the Third National Bank as collateral for a $304,400 loan due July 1, 2020. The assignment agreement calls for Wildhorse to continue to collect the receivables. Third National Bank assesses a finance charge of 3% 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 journal entry for Rasheed's collection of $350,000 of the accounts receivable during the period from April 1, 2014, through June 20, 2020.
b. 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

A. Dr Cash $350,000

Cr Accounts receivable $350,000

B. Dr Notes payable $304,400

Dr Interest expense $7,610

Cr Cash $312,010

Step-by-step explanation:

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

Dr Cash $350,000

Cr Accounts receivable $350,000

(To record collection of accounts receivable )

B. Preparation of the journal entry to record the payment.

Dr Notes payable $304,400

Dr Interest expense $7,610

(10%*$304,400*3/12)

Cr Cash $312,010

($304,400+$7,610)

(To record payment)