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 2018, the company had accounts receivable of $820,000. Lonergan needs approximately $520,000 to capitalize on a unique investment opportunity. On July 1, 2018, a local bank offers Lonergan the following two alternatives:

Borrow $520,000, 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.

Transfer $570,000 of specific receivables to the bank without recourse. The bank will charge a 2% factoring fee 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:
    a. alternative a.
    b. alternative b.

2. Assuming that 90% of all June 30 receivables are collected during July, prepare the necessary journal entries to record the collection and the remittance to the bank for:
    a. alternative a.
    b. alternative b.

Explanation / Answer

Journal Entry in the Books of Lonergan Company Date Account Desription , Title Debit Credit Part-1 Option A Cash $520,000.00 1-July Notes Payable $520,000.00 ( To Record fund Borrowed through issuing Note Payable) Option B Cash( $570000*98%) $558,600.00 Loss on transfer of Receivable $11,400.00 Account Receivable $570,000.00 ( To record factoring receivable through Bank at 2 % discount) Part-2 Option A Cash $738,000.00 Account Receivable ($820000*90%) $738,000.00 ( To record 90% cash received against AR) Interest Expense (520000*12%*1/12) $5,200.00 Notes Payable $520,000.00 Cash $525,200.00 ( To record Interest expense and payment of Note Payable) Option B Cash (780000-570000)*90% $189,000.00 Account Receivable $189,000.00 ( To Record received 90% amount against balance AR)

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