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

Answer:

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]