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Subject Topic: Interest Cost on Factored A/R (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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GVen
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Posted: 07 Sep 2012 at 14:47 | IP Logged  

Note that in the answer below, the Annual Interest Expense on factored A/R is 10% times the Monthly $80K, with no further annualization. I guess this is because they are saying, each month there is only an $80K net advanced amount which is multiplied against the 10% rate.

My question is, doesn't this assumption hinge on the 30 day avg collection period? If the question said collection was 20 days, then would the annual Interest Exp only be 2/3*$80k, assuming a 360 day year? If it said a 60 day period, would you double the interest expense collected? Seems like an important nuance.

 

Question CPA-04079

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?

a. 12.0 percent.

b. 14.0 percent.

c. 16.0 percent.

d. 17.5 percent.

Explanation

Choice "d" is correct. 17.5% annual cost of financing.

Cost to

A/R Company

Amount of A/R Submitted $100,000

2%

360/30

=

$24,000

Amount Not Advanced (20,000)

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

Net cost $14,000

17.5% Annual cost of financing

Amt advance $80,000

= =



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