On April 1, 2020, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2020. 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).
Required:
1. Prepare the April 1, 2020 journal entry for Rasheed company.

The journal entry for Rasheed company on April 1,2020 will be:

Account title                                                   Dr             Cr

Cash                                                          192,000

Finance charge                                         8,000

      Notes payable                                                      200,000

Finance charge = $400,000 x 2% = 8,000

Notes Payable = 200,000

Cash = 200,000 - 8,000 = 192,000

Debit: Cash with $192,000

Debit: Finance charge with $8,000

Credit: Notes payable with $200,000

Explanation:

Step 1: Calculation of finance charge and cash received

Finance charge = $400,000 × 2% = $8,000

Cash received = $200,000 - $8,000 = $192,000

Step 2: Calculation preparation of journal entry

The journal entries appear as follows:

                                                                DR ($)                  CR ($)

Cash                                                       192,000

Finance charge                                         8,000

Notes payable                                                                200,000

Being the cash received and finance charge on note payable.

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