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(solution) Lonergan Company occasionally uses its accounts receivable to


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.

 


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Sep 13, 2020

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