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Lonergan Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2013, the company had accounts receivable of $780,000. Lonergan needs approximately $500,000 to capitalize on a unique investment opportunity. On July 1, 2013, 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.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M948115

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