Reference no: EM133152127
Question - Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2021, the company had accounts receivable of $1,080,000. Lonergan needs approximately $650,000 to capitalize on a unique Investment opportunity. On July 1, 2021, a local bank offers Lonergan the following two alternatives:
a. Borrow $650,000, 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 $700,000 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. 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.
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