Question

Finman company designated Jill Holland as pretty cash custodian and established a pretty cash fund of 200$.

Problem 1 (25 points): The following transactions occurred in Mars Co. in 2019 1. Accounts receivable in the amount of $1,000,000 were assigned to Utley Finance Co. by Mars as security for a loan of $850,000. Utley charged a 3% commission on the accounts; the interest rate on the note is 12%. 2. During the first month, Mars collected $400,000 on assigned accounts after deducting $900 of discounts. Mars wrote off a $1,060 assigned account. 3. Mars paid to Utley the amount collected plus one month's interest on the note. Instructions: 1. Prepare journal entries for Mars Co. in 2019 2. Explain the differences in accounting for a secured borrowing and a sale of receivables.

Answer 1

Problem 1
	Journal
	In the books of Mars Co
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1	Bank A/c	Dr	820,000
	Commission Expense A/c	Dr	30,000
	To 12% Loan	Cr		850,000
	(Being loan taken and commission paid @ 3% on 1,000,000)
2	Bank A/c	Dr	400,000
	Discount Expense A/c	Dr	900
	Bad Debts written off A/c	Dr	1,060
	To Accounts Receivable A/c	Cr		401,960
	(Being amount realised from debtors and discount and bad debts expensed off)
3	12% Loan A/c	Dr	400,000
	Interest Expense A/c	Dr	8,500
	To Bank A/c	Cr		408,500
	(Being loan paid and interest paid for 1 month)

In case of secured borrowings, a company undertakes a liability and hence a liability is created which needs to be repaid. In case of sale of receivables, the company forgoes its rights over assets and it is sale of assets. Any realisation from receivable shall go directly to the buyer of receivables and company shall get the proceeds from sale of receivables.

Problem 2

		31-Dec-14
Date	Payment	No of days till 31.12.2014	Interest ($) till 31.12.2014	9% bonds utilised	9% bonds left	12% General Debt utilised	12% General Debt left
1-Jun-14	5,000,000	213	262,603	5,000,000	-
1-Jun-14	1,000,000	213	70,027	-	-	1,000,000	250,000
31-Aug-14	9,000,000	122	10,027	-	-	250,000	-
31-Dec-14	7,500,000	-	-	-	-	-	-
			342,658	5,000,000		1,250,000

Interest to be capitalised = $ 342,658