Lonergan Company occasionally uses its accounts receivable to obtain immediate c

Question

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2013, the company had accounts receivable of $780,000. Lonergan needs approximately $500,000 to capitalize on a unique investment opportunity. On July 1, 2013, a local bank offers Lonergan the following two alternatives: a. Borrow $500,000, 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 $550,000 of specific receivables to the bank without recourse. The bank will charge a 2% finance charge 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 each of the alternatives. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) -Record the borrowing of $500,000 and signing of a note payable. -Record the transfer of receivables. 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. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Alternative a: -Record the entry of cash collections. -Record the entry of cash remittance to bank. Alternative b: -Record the entry of cash collections.

Explanation / Answer

To record the borrowing of $500,000 and signing of a note payable: July 1, 2013 ======================================================================================================================= Cash 500,000 ======================================================================================================================= Note payable 500,000 Alternative b: ======================================================================================================================= To record the transfer of receivables: July 1, 2013 Cash ($550,000 x 98%) 539,000 ======================================================================================================================= Loss on transfer of receivables (2% x $550,000) 11,000 ======================================================================================================================= Accounts receivable 550,000 ======================================================================================================================= ======================================================================================================================= July, 2013 Cash (80% x $780,000) 624,000 ======================================================================================================================= Accounts receivable 624,000 ======================================================================================================================= July 31, 2013 ======================================================================================================================= Interest expense ($500,000 x 12% x 1/12) 5,000 ======================================================================================================================= Note payable 500,000 ======================================================================================================================= Cash 505,000 ======================================================================================================================= $550 of accounts receivable are now held by the bank, and presumably the bank has collected .8 x $550 = $440 during July. Lonergan still holds accounts receivable of ($780

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