Lonergan Company occasionally uses its accounts receivable t

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2018, the company had accounts receivable of $900,000. Lonergan needs approximately $560,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives: 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. 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.

Solution

Question 1

Journal entries:

Alternative a- Borrowed $560,000 from bank against receivables (as collateral)

Bank a/c or cash a/c

To Note payable a/c

(Being money borrowed from the bank against account receivables)

$560,000

Alternative b: Factoring of specific receivables of amount $610,000 by bank (without recource)

Bank a/c or cash a/c

To Accounts receivables a/c

(Being bank factored the specific receivables without recource)

$610,000

$610,000

Question 2

Journal entries to record the collection and the remittance to the bank:

Alternative a

Bank a/c or cash a/c

To Accounts receivable a/c

(Being 80% of the Accounts receivables collected)

($900,000 x 80%)

$720,000

$720,000

Note payable a/c

Interest a/c

To Bank a/c or cash a/c

(Being amount repaid to bank along with the interest)

$560,000

$67,200

$627,200

Working note -Calculation of interest

Unpaid balance of note on July/01/2018 = $560,000

Interest payable at the end of the month i.e on july/31/2018 = $560,000 x 12% = $67,200

Alternative b

Factoring fee a/c

To Bank a/c or cash a/c

(Being factoring fee remitted to bank)

($610,000 x 2%)

$12,200

$12,200

Note: Since specific receivables of amount $610,000 factored without recource by the bank, company don\'t need to make any remittances to the bank. Therefore there won\'t be any jounal entries for the same.

Hope this is useful and thank you!!!!!!