Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $960,000. Lonergan needs approximately $590,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

(a) Borrow $590,000, 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 12% interest on the unpaid balance of the note at the beginning of the period.
(b) Transfer $640,000 of specific receivables to the bank without recourse. The bank will charge a 4% 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 alternative

Answer 1

To prepare the journal entries on July 1 for the two alternatives, you need to consider the specific requirements of each alternative. For alternative (a), the journal entries involve borrowing the required amount and making monthly remittances. For alternative (b), the journal entries include transferring specific receivables and recording the factoring fee.

Step-by-step explanation:

To prepare the journal entries on July 1 for the two alternatives, we need to consider the specific requirements of each alternative:

Alternative (a)

1. Journal entry to record the borrowing of $590,000:

• Debit Notes Payable: $590,000
• Credit Accounts Receivable: $590,000

2. Journal entry at the end of each month to remit the receivables collected plus interest:

• Debit Cash (amount collected)
• Debit Interest Expense (12% of unpaid balance)
• Credit Notes Payable
• Credit Accounts Receivable

Alternative (b)

1. Journal entry to record the transfer of $640,000 of specific receivables:

• Debit Accounts Receivable - Transfer (specific receivables): $640,000
• Credit Accounts Receivable (whole balance): $640,000

2. Journal entry to record the factoring fee:

• Debit Factoring Fee Expense: $25,600 ($640,000 x 4%)
• Credit Accounts Receivable - Transfer: $25,600

Answer 2

Step-by-step explanation:

Alternative 1:

Dr CASH 590,000

Cr Notes Payable 590,000

Dr Interest expense 5900 [590,000*12%/12]

Dr Notes payable 590,000

Cr CASH 595,900

Alternative 2:

Dr CASH 614,400

Dr Loss on transfer of receivables 25,600

Cr Accounts receivables 640,000

[4%*640,000]