12. Secured Borrowing Debits and Credits

Entry to record pledging accounts receivable as collateral for a note (secured borrowing)

Debit Cash for amount of note - finance charge amount, Debit Interest Expense for finance charge amount, Credit Notes Payable for full amount of note.

Entry to record when you are the company that is lending a note to another company(secured borrowing)

Debit Notes Receivable for full amount of note, Credit Interest revenue for finance charge amount, Credit cash for full amount - finance charge amount.

Entry to record collection of accounts receivable when you are using it as collateral for a note, with sales discounts and sales returns applied (secured borrowing)

• Debit Cash for amount of cash collected

• Debit Sales Discounts for amount of sales discount

• Debit Sales Returns and Allowances for amount of sales returns and allowances

• Credit Accounts receivable for amount of cash collected + sales discounts + sales returns and allowances

Entry to record when the company you lent the note to collects some of its accounts receivable (secured borrowing)

The company that lent the note does not record any journal entry.

Entry for remitting collected accounts receivables to the company you borrowed the note from (secured borrowing)

• Debit Notes Payable for full amount remitted

• Debit Interest Expense for amount of interest expense (this is using the amount calculated using the % for the interest, not the finance rate %. Multiply interest % by the carrying value of the note (amount that needs to be paid off still)). Since interest is for a year, if the period is only a month then you would only calculate 1 month of interest.

• Credit Cash for notes payable + interest expense amount.

Entry for when the company you lent the note to remits its collected accounts receivable to you (secured borrowing)

• Debit Cash for amount remitted + interest revenue (Using the interest %, not the financing %. Multiply interest % by the carrying value of the note (amount that needs to be paid off still)).

• Credit Notes receivable for amount of cash the company remitted

• Credit Interest revenue for amount of interest. (Since interest is for a year, calculate just one months interest using the interest %, not the financing %).

Entry to record collecting accounts receivable as the company that borrowed the note when some of accounts receivable is uncollectible (secured borrowing)

• Debit Cash for amount collected - uncollectible amount.

• Debit Allowance for doubtful accounts for amount uncollectible.

• Credit Accounts Receivable for amount of cash collected + uncollectible amount.

• There is no entry for the lender of the note when the borrower collects accounts receivable.