Question

(Assigning Accounts Receivable) On April 1, 2017, Rasheed Company assigns \(400,000 of its accounts receivable to the Third National Bank as collateral for a \)200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).

Instructions

(a) Prepare the April 1, 2017, journal entry for Rasheed Company.

(b) Prepare the journal entry for Rasheed’s collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.

(c) On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.

Short answer

The company will pay interest equal to$5,000 on repayment of the note.

Step-by-step solution

Definition of Accrued Interest

Accrued interest is the e interest expense that is charged over the company for a specific period, but not paid in the same period.

Journal entry for Rasheed Company on 1 April

Date	Accounts and Explanation	Debit $	Credit $
1 April 2017	Cash	$192,000
	Interest expenses $\left(\$400,000\times 2\%\right)$	$8,000
	Note payable		$200,000

Journal entry for collection of accounts receivables

Date	Accounts and Explanation	Debit $	Credit $
2017	Cash	$350,000
	Accounts Receivables		$350,000

Journal entry for repayment

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Note payable	$200,000
	Interest Expenses$\left(\$200,000\times 10\%\times \frac{3}{12}\right)$	$5,000
	Cash		$205,000