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Problem 7-7 (Algo) Factoring versus assigning of accounts receivable [LO7-8]

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,120,000. Lonergan needs approximately $660,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:

1. Borrow $660,000, 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 10% interest on the unpaid balance of the note at the beginning of the period.
2. Transfer $720,000 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.

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Record the borrowing $660,000, sign a note payable, and assign the entire receivable balance as collateral.

Record the transfer $720,000 of specific receivables to the bank without recourse. The bank will charge a 2% factoring fee on the amount of receivables transferred.

Record the collection of receivables, assuming that 70% of all June 30 receivables are collected on July 31.

Record the month-end remittance to the bank as the amount of receivables collected plus 10% interest on the unpaid balance of the note at the beginning of the period.

Record the collection of receivables, assuming that 70% of all June 30 receivables are collected on July 31. The bank will collect the transferred receivables directly.