Sander\'s Fence Company borrowed $ 290,000 from Home Capital by issuing a 3-year

Question

Sander's Fence Company borrowed $ 290,000 from Home Capital by issuing a 3-year (36-month), 3 % note payable. Sander's uses $ 315 comma 000 of its accounts receivable as collateral for the lending arrangement, transferring the right to the receivable payments if Sander defaults on the loan. Sander services the accounts receivable, sending bills and collecting the payment from customers. Sander must pay Home $ 8,700 at the end of the month regardless of the amount of the receivables it collects. At the end of the first month, Sander has collected $ 7,900 of the receivables that are collateral for the loan and pays $ 8,700 to Home plus interest.

Prepare the journal entries to record the collection of the receivables and the payment t0 Home

Debit Interest expense

Debit Notes Payable 8700

Credit Cash

What is the interest expense

Explanation / Answer

Journal Entry For Payment to Home

Dr. Interest Expense..............................725

Dr. Notes payable.................................8700

Cr.Cash.................................................9425

Interest Expense = 290000*3%*1/12

= 725

Journal Entry For Collection of receivables

Dr. Cash.......................................7900

Cr.Debtors...................................7900

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