On April 1, 2012, Prince Company assigns $500,000 of its accounts receivable to

Question

On April 1, 2012, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2012. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).

(a) Prepare the April 1, 2012, journal entry for Prince Company (b) Prepare the journal entry for Prince

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Cash Dr. 290000

Finance Charge (500000*2%) Dr. 10000

Notes Payable Cr. 300000

Part B:

Cash Dr. 350000

Accounts Receivable Cr. 350000

Part C:

Notes Payable Dr. 300000

Interest Expense (10%*300000*3/12) Dr. 7500

Cash Cr. 307500

Thanks.

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