Can anyone explain this Becker question?
I guess what is really confusing me is why they calculate interest expense on the A/R and amount advance for one month, but the fee and net cost are for a whole year.. I thought you would have to convert everything into one year
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. 17.5 percent.
b. 14.0 percent.
c. 16.0 percent.
d. 12.0 percent.
Explanation
Choice “a” is correct. 17.5% annual cost of financing.
A/R
Cost to
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
Amt advance
=
$14,000
$80,000
=
17.5% Annual cost of financing
AUD- 99 (5/29/14)
FAR- 92 (7/3/14)
REG- 93 (8/22/14)
BEC- 94 (10/11/14)
.
