Question

On October 1, 2020, Pronghorn, Inc. assigns $1,205,800 of its accounts receivable to Stellar National Bank as collateral for a $722,900 note. The bank assesses a finance charge of 3% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

Answer 1

The journal entries are as follows:

In accounts of Pronghorn, Inc.,

October 1,

Cash A/c Dr. $686,726

Interest expense A/c Dr. $36,174

To Notes payable $722,900

(To record the notes payable)

In accounts of Stellar National Bank,

October 1,

Notes Receivable A/c Dr. $722,900

To cash A/c $686,726

To interest revenue $36,174

(To record the notes receivable)

Workings:

Interest expense:

= Accounts receivables × Finance change percent

= $1,205,800 × 0.03

= $36,174

Note: Interest can also entered as the finance charges.