Question
Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2016, the company had accounts receivable of $900,000. Lonergan
Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2016, the company had accounts receivable of $900,000. Lonergan needs approximately $560,000 to capitalize on a unique investment opportunity. On July 1, 2016, a local bank offers Lonergan the following two alternatives: |
a. | Borrow $560,000, 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. |
b. | Transfer $610,000 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. & 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.) |
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