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 Topic: beckers 3 que ( Topic Closed)
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ssham1976
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Joined: 12 Apr 2009
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| Posted: 16 Feb 2010 at 19:33 | IP Logged
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A company enters into an agreement with a firm who will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average $100,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at an annual rate of 10 percent and charge a fee of 2 percent on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?
ans 17.5%
Cost to
A/R Company
Amount of A/R Submitted $100,000 ´ 2% ´ 360/30 = $24,000
Amount to Calculate
Interest Exp 80,000 ´ 10% = 8,000
Cost to Company 32,000
Less Collection Expense Saved (18,000)
Net Cost $14,000
why they use 24000 for entire year at 2% and
used the 10 % for a monthly basis
not consistent
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EAK5455
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Joined: 08 Jan 2010
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| Posted: 17 Feb 2010 at 09:46 | IP Logged
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Annual Fee:
$100,000/month x 12 months x 2% = $24,000 Annual Fee
* Each month, the A/R company will receive $100,000 in A/R. Over a year, this equates to $1,200,000. As such we apply the 2% annual
factoring fee to the $1,200,000 annual amount received.
Interest Expense on Cash Advance:
$80,000 x 10% = $8,000 Interest Expense
** Each month, the A/R company is going to sell $100,000 of A/R accounts to the factoring company and in return receive a cash advance
of $80,000. Because the problem states that the A/R has an average collection period of 30 days, we know that the factoring company
will only be advancing the $80,000 to us for a period of 30 days. However, this procedure of borrowing $80,000 for 30 days will repeat
every month during the year. Therefore, there will be a rolling $80,000 being advanced to the A/R company throughout the entire year.
As such, we will apply the 10% annual advance fee to the entire $80,000.
Total Expenses:
$24,000 fee + $8,000 Int. Expense = $32,000
Cost Savings:
$18,000
Total Net Cost:
$32,000 - $18,000 = $14,000
Annual Cost of Financing:
$14,000 / $80,000 = 17.5%
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alas2y
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Joined: 03 Jul 2011
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| Posted: 03 Jul 2011 at 00:35 | IP Logged
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Thanks for posting! Now I see what i was doing wrong.
__________________
Reg 79
Aud 80
Far 83
Bus taking it on jul 15th 2011
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