Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,060,000. Lonergan needs approximately $640,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

a. Borrow $640,000, 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 9% interest on the unpaid balance of the note at the beginning of the period.
b. Transfer $690,000 of specific receivables to the bank without recourse. The bank will charge a 2% 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 80% 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

Answer and Explanation:

The Journal entry is shown below:-

1. a. Cash  Dr, $640,000

   To Notes Payable   $640,000

(Being notes payable is recorded)

b. Cash   Dr, $676,200

Loss on transfer of receivable Dr, $13,800  ($390,000 × 2%)

       To Account receivable  $690,000

(Being accounts receivable is recorded)

2. a. Cash  Dr, 848,000

      To Account Receivable  $848,000 ($1060,000 × 80%)

(Being account receivable is recorded)

b. Cash  Dr, $158,000  ($1060,000 × 80%) - $690,000

To Account Receivable   $158,000

(Being account receivable is recorded)