Question

On March 1, 2014, Rasheed Company assigns $800,000 of its accounts receivable to the Third National Bank as collateral for a $500,000 loan due April 1, 2014. The assignment agreement calls for Rasheed Company to continue to collect the receivables. Third National Bank assesses a finance charge of 3% of the accounts receivable, and interest on the loan is 9% (a realistic rate of interest for a note of this type).

a. Prepare the March 1, 2014, journal entry for Rasheed Company.

b. Prepare the journal entry for Rasheed’s collection of $750,000 of the accounts receivable during March of 2014. No discounts, returns, or uncollectible accounts apply.

c. On April 1, 2014, Rasheed paid Third National all that was due from the loan it secured on March 1, 2014. Prepare the journal entry to record this payment.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

1. Cash A/c Dr $476,000

   Finance Charges A/c $24,000     ($800,000 × 3%)

         To Notes Payable A/c $500,000

(Being the notes payable is recorded)

2. Cash A/c Dr $750,000

       To Accounts Receivable $750,000

(Being cash is collected)

3. Notes Payable A/c Dr $500,000

   Interest Expenses A/c Dr $3,750

           To Cash A/c Dr $503,750

The interest expense is computed below

= Principal × rate of interest × number of months ÷ (total number of months in a year)  

= $500,000 × 9% × (1 months ÷ 12 months)

= $3,750

The 1 month is calculated from the March 1 to April 1