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On April 1, 2020, Vaughn Company assigns $524,600 of its accounts receivable to the Third National Bank as collateral for a $336,000 loan due July 1, 2020. The assignment agreement calls for Vaughn to continue to collect the receivables. Third National Bank assesses a finance charge of 4% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Prepare the April 1, 2020, journal entry for Vaughn Company.

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Answer and Explanation:

The journal entry is shown below:

On April 1, 2020

Cash $315,016

Finance charge ($524,600 × 4%) $20,984  

            To Notes payable  $336,000

(Being the cash and finance charge is recorded)

Fo recording this we debited the cash and finance charge as it increased the assets and expenses and credited the note payable as it also increased the liabilities

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