Accounts receivable in the amount of 250,000 were assigned to the fast Finance Company by Nance INC as security for a loan of 200,000. The finance company charged a 4% commision on the face amount of the loan, and the note bears interest at 9% per year. During the first month Nance collected 130,000 on assigned accounts. This amount was remitted to the finance company along with one month's interest on the note.
Make all the entries for Nance Inc associated with the transfer of the accounts receivable, the loan, and the remittance to the finance company.
There are several journal entries that need to be made for Nance Inc. I will list each journal entry along with a brief explanation:
1. To record transfer of accounts receivable to Fast Finance Company:
Accounts Receivable Assigned to Fast Finance 250,000
Accounts Receivable 250,000
(To record the transfer of accounts receivable to Fast Finance Company as security for the loan)
2. To record the loan received from Fast Finance Company:
Cash 190,000
Finance Charge 10,000
Loan Payable 200,000
(To record the loan received from Fast Finance Company, after deducting the 4% commission)
3. To record the collection of assigned accounts receivable:
Cash 130,000
Accounts Receivable Assigned 130,000
(To record the collection of $130,000 of assigned accounts receivable)
4. To record the remittance to Fast Finance for collections and one month's interest on the loan:
Loan Payable 130,000
Interest Expense 1,500
Cash 131,500
(To record the remittance of $130,000 for collected receivables and $1,500 interest payment, calculated as: $200,000 * 9% / 12 = $1,500)
After these transactions, the remaining balances for each account would be:
- Accounts Receivable Assigned to Fast Finance: $120,000
- Cash: $198,500 ($250,000 original balance + $190,000 loan - $130,000 collected + $130,000 remittance - $1,500 interest expense)
- Loan Payable: $70,000 ($200,000 original loan - $130,000 remitted)
1. Transfer of accounts receivable:
Accounts Receivable: Debit $250,000
Finance Company Loan Payable: Credit $250,000
2. Loan received from Fast Finance Company:
Cash: Debit $200,000
Finance Company Loan Payable: Credit $200,000
3. Commission charged by Fast Finance Company:
Finance Company Loan Payable: Debit $8,000 ($200,000 x 4%)
Commission Expense: Debit $8,000
Cash: Credit $8,000
4. Interest accrued on the note for the first month (assuming a 30-day month):
Interest Expense: Debit $1,500 ($200,000 x 9% x 1/12)
Interest Payable: Credit $1,500
5. Remittance to the finance company:
Cash: Debit $131,500 ($130,000 + $1,500)
Interest Payable: Debit $1,500
Accounts Receivable: Credit $130,000
Interest Revenue: Credit $1,500
Note: These entries are based on the assumption that Nance Inc recognizes interest expense and revenue on an accrual basis. Additionally, it is important to consult with an accountant or financial professional for specific accounting and tax advice tailored to your company's situation.
To make all the necessary entries for Nance Inc associated with the transfer of accounts receivable, the loan, and the remittance to Fast Finance Company, let's break it down into steps:
Step 1: Transfer of Accounts Receivable
When Nance Inc assigned the accounts receivable of $250,000 to Fast Finance Company, it needs to make the following journal entry:
Debit: Accounts Receivable - Nance Inc ($250,000)
Credit: Accounts Receivable - Fast Finance Company ($250,000)
Step 2: Loan Received from Fast Finance Company
When Nance Inc received the loan of $200,000 from Fast Finance Company, it needs to make the following journal entry:
Debit: Cash ($200,000)
Credit: Notes Payable - Fast Finance Company ($200,000)
Step 3: Commission Charged by Fast Finance Company
Fast Finance Company charged a 4% commission on the face amount of the loan ($200,000). So, Nance Inc needs to record this commission expense:
Debit: Commission Expense ($8,000)
Credit: Cash ($8,000)
Step 4: Note Interest Expense
The note from Fast Finance Company bears interest at a rate of 9% per year. Assuming the interest is calculated monthly, Nance Inc needs to record the interest expense for the first month:
Debit: Interest Expense ($1,500) [($200,000 x 9%) / 12]
Credit: Interest Payable ($1,500) [($200,000 x 9%) / 12]
Step 5: Remittance to Fast Finance Company
When Nance Inc collected $130,000 on assigned accounts and remitted it to Fast Finance Company, it needs to make the following journal entry:
Debit: Accounts Receivable - Fast Finance Company ($130,000)
Debit: Interest Payable ($1,500) [to close the liability, assuming no outstanding interest]
Credit: Cash ($131,500)
These entries reflect the transfer of accounts receivable, the loan received, the commission charged, the note interest expense, and the remittance to Fast Finance Company by Nance Inc.