Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $900,000. Lonergan needs approximately $560,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

1. Borrow $560,000, 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.
2. Transfer $610,000 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

Lonergan Company
Particulars	Accounts Titles & Explanations	Debit	Credit
1.a
01-Jul	Cash	$560000
	To Notes Payable		$560000
	(Notes payable collected)
1.b
01-Jul	Cash	$597800
	Loss on sale of receivables	$12200
	To Accounts Receivables		$610000
	(Remittance to bank)
2.a	Cash ( $900,000. x 80%)	$720000
	To Notes Payable		$720000
	Interest Expense($560000 x 12%x 1/12)	$5600
	Notes Payable	$560000
	To Cash		$565600
2.b	Cash ($900000 -$610000)x 80%	$232000
	To Accounts Receivable		$232000