Free

70.2K

Verified Solution

Link Copied!

Lonergan Company occasionally uses its accounts receivable toobtain immediate cash. At the end of June 2018, the company hadaccounts receivable of $1,060,000. Lonergan needs approximately$640,000 to capitalize on a unique investment opportunity. On July1, 2018, a local bank offers Lonergan the following twoalternatives:

1. Borrow $640,000, sign a note payable, and assign the entirereceivable balance as collateral. At the end of each month, aremittance will be made to the bank that equals the amount ofreceivables collected plus 9% interest on the unpaid balance of thenote at the beginning of the period.
2. Transfer $690,000 of specific receivables to the bank withoutrecourse. The bank will charge a 2% factoring fee on the amount ofreceivables transferred. The bank will collect the receivablesdirectly from customers. The sale criteria are met.

Required:
1. Prepare the journal entries that would berecorded on July 1 for:
    a. alternative a.
    b. alternative b.

2. Assuming that 80% of all June 30 receivablesare collected during July, prepare the necessary journal entries torecord the collection and the remittance to the bank for:
    a. alternative a.
    b. alternative b.

Prepare the journal entries that would be recorded on July 1 foralternative b. (If no entry is required for a transaction/event,select "No journal entry required" in the first account field.)

• Record the transfer $690,000 of specific receivables to thebank without recourse. The bank will charge a 2% factoring fee onthe amount of receivables transferred.

Note: Enter debits before credits.

Assuming that 80% of all June 30 receivables are collectedduring July, prepare the necessary journal entries to record thecollection and the remittance to the bank for alternative a. (If noentry is required for a transaction/event, select "No journal entryrequired" in the first account field.)