Question

On October 1, 2020, Waterway Inc. assigns $1,900,000 of its accounts receivable to Ottawa National Bank as collateral for a $1,114,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 6%. Prepare the October 1 journal entries for both Waterway and Ottawa

Answer 1

Journal Entries

Waterway Inc.

October 1

Dr. Cash $1,076,000

Dr. Interest Expense $38,000

Cr. Note payable $1,114,000

Ottawa National Bank

October 1

Dr. Note Receivable $1,114,000

Cr. Interest revenue $38,000

Cr. Cash $1,076,000

Step-by-step explanation:

Interest = $1,900,000 x 2% = $38,000

At the time of assigning the account receivable the finance charges is applicable the interest on the loan note will be recorded when it accrues. Interest expense as finance charges will be added to calculate the Note payable value for Waterway Inc. and Note receivable value for Ottawa National Bank.