Reference no: EM131017841

P 7-7 Factoring versus assigning of accounts receivable. Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of

P 7-7 Lonergan Company

Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2011, the company had accounts receivable of $780,000. Lonergan needs approximately $500,000 to capitalize on a unique investment opportunity. On July 1, 2011, a local bank offers Lonergan the following two alternatives:

a. Borrow $500,000, 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 $550,000 of specific receivables to the bank without recourse. The bank will charge a 2% finance charge 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 each of the alternatives.

2. Assuming that 80% of all June 30 receivables are collected during July, prepare the necessary journal entries to record the collection and the remittance to the bank.

3. For each alternative, explain any required note disclosures that would be included in the July 31, 2011, financial statements.