On June 30, 2016, the High Five Surfboard Company had outstanding accounts receivable of $720,000. On July 1, 2016, the company borrowed $570,000 from the Equitable Finance Corporation and signed a promissory note. Interest at 10% is payable monthly. The company assigned specific receivables totaling $720,000 as collateral for the loan. Equitable Finance charges a finance fee equal to 1.2% of the accounts receivable assigned.
Required: Prepare the journal entry to record the borrowing on the books of High Five Surfboard. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Accounts receivable refers to the amount that is due from a customer on a credit sale, either for products and services that they have purchased but have yet to pay for. It is shown as a part of the current assets on the balance sheet of a company.
Answer and Explanation:
The journal entry to record the borrowing on the books of High Five Surfboard is as follows:
|Date||Particulars||Debit ($)||Credit ($)|
|Finance Charges Expense (1.8% * $720,000)||12,960|
|To Liability Financing Arrangement Account||570,000|
|(To record borrowings from Equitable Finance Corporation)|
Cash is an asset and as its balance is increasing, it's debited. The finance charges are an expense, and as that balance is also increasing, it too is debited. The liability financing arrangement account is a liability account, whereby the company borrowed money from an equitable finance corporation, resulting in an increase in the balance in this account. Therefore, this account is credited.
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from Financial Accounting: Homework Help ResourceChapter 3 / Lesson 20