PROBLEM BBB GOMEZ INCOTTAWA NATIONAL On October 1 2017 Gomez

PROBLEM BBB: GOMEZ INC/OTTAWA NATIONAL On October 1, 2017, Gomez Inc. assigns $2.000,000 of its accounts receivable to Ottawa National Bank as collateral for a $1,500,000 note. The bank assesses a finance charge of 2% or the receivables assigned and interest on the note of 7%. Prepare the October 1 journal entries for both Gomez and Ottawa.

Solution

Gomez Inc

Cash. 1,460,000

Interest Expense ($2,000,000 X2%). 40,000

Notes Payable. 1,500,000

Ottawa National Bank

NotesReceivable. 1,500,000

Cash . 1,460,000

Interest Revenue ($2,000,000 X 2%). 40,000

Interest can also entered as finance charges