Question

Slide 30-13

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $1,060,000. Lonergan needs approximately $640,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonegan the following two alternatives:

1. 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.
2. 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:

1. Alternative
2. Alternative

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:

1. Alternative
2. Alternative

Complete the questions by entering your answers in the table below.

1. Prepare the journal entries that would be recorded on July 1 for alternative a. (If no entry is required for a transaction/event, type “No journal entry required in the first account field.)

1. Record the borrowing $640,000, sign a note payable, and assign the entire receivable balance as collateral.

2. Prepare the journal entries that would be recorded on July 1 for alternative b. (If no entry is required for a transaction/event, type “No journal entry required in the first account field.)

1. Record the transfer of $690,000 of specific receivables to the bank without recourse. The bank will charge a 2% factoring fee on the amount of receivables transferred.

3. 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 alternative a. (If no entry is required for a transaction/event, type “No journal entry required in the first account field.)

1. Record the collection of receivables, assuming that 80% of all June 30 receivables are collected on July 31

4. 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 alternative a. (If no entry is required for a transaction/event, type “No journal entry required in the first account field.)

1. Record 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.

5. 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 alternative b. (If no entry is required for a transaction/event, type “No journal entry required in the first account field.)

1. Record the collection of receivables, assuming that 80% of all June 30 receivables are collected on July 31. The bank will collect the transferred receivables directly.

Date	General Journal	Debit	Credit

Answer 1

Alternative A
Date	General Journal	Debit	Credit
01-Jul-16	Cash	640,000
	Note payable		640,000
July, 2016	Cash(1060000*80%)	848,000
	Accounts receivable		848,000
31-Jul-16	Interest expense(640000*9%*1/12)	4,800
	Note payable	640,000
	Cash		644,800
Alternatve B
Date	General Journal	Debit	Credit
01-Jul-16	Cash(690000*98%)	676,200
	Loss on transfer of receivables(690000*2%)	13,800
	Accounts receivable		690,000
31-Jul-16	Cash(1060000-690000)*80%	296,000
	Accounts receivable		296,000