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 2016, the company had accounts receivable of $880,000. Lonergan needs approximately $540,000 to capitalize on a unique investment opportunity. On July 1, 2016, a local bank offers Lonergan the following two alternatives: a. Borrow $540,000, 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 9% interest on the unpaid balance of the note at the beginning of the period. b. Transfer $600,000 of specific receivables to the bank without recourse. The bank will charge a 3% factoring fee on the amount of receivables transferred. The bank will collect the receivables directly from customers. The sale criteria are met. Required: 1. & 2.Prepare the journal entries that would be recorded for each of the alternatives. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Alternative a:

Explanation / Answer

For Loan Borrowed below jounal entry will be required: Journal Entries Date Account Title and explanation Debit Credit For Borrow the Loan Cash $               5,40,000       To Note Payable $                 5,40,000 (To record the loan borrowed) OPTION A: For receivable collateral "no journal entry is required" OPTION B: Date Account Title and explanation Debit Credit For Factoring Fees belwo entry is passed Bank Service Charges $                  18,000      To Cash $                     18,000 (To Record the bank service Cahrges)

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