On October 1, 2016, Watergate Hotels borrowed $400,000 at 12% interest and pledg

Question

On October 1, 2016, Watergate Hotels borrowed $400,000 at 12% interest and pledged S500.000 in accounts receivables as collateral. Additionally, Watergate was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest Required: Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables. and the recognition of interest expense.

Explanation / Answer

Journal Entries (Amount in $)

Account Titles Debit    Credit Cash 395,000 Finance charge expense ($500,000*1%) 5,000 Liability-Financing arrangement 400,000 (To record the borrowings on assignment of receivables) Cash 300,000 Account Receivable 300,000 (To record cash received from Account Receivables) Interest expense ($400,000*12%*3/12) 12,000 Liabilty-Financing arrangement 300,000 Cash 312,000 (To record payment to borrower for assigned receivables and interest)

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