January 26, 2020 at 1:50 pm #2903442TNTTNParticipant
Hi everyone, I've been studying BEC chapter 2 (Becker) on and off for a bout 3 weeks now and can't seem to get the materials. I passed FAR & REG on the first try with score above 80. Though BEC was easier, but man, I was wrong. I feel like BEC is harder than FAR & REG which made more sense to me. I feel very discouraged this time. Arggggg….Below is the question I've been trying to understand but can't. Please help.
The Frame Supply Company has just acquired a large account and needs to increase
its working capital by $100,000. The controller of the company has identified a source
of funds which is given below:
Pay a factor to buy the company's receivables, which average $125,000 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 10 percent and charge a fee of 2 percent
on all receivables purchased. The controller estimates that the firm would save
$24,000 in collection expenses over the year. Assume the fee and interest are not
deductible in advance.
Using a 360-day year in all of your calculations, the cost of factoring is?
Choice “C” is correct.
AR Submitted = $125,000 x 2% x 360/30 = $30,000
Amount withheld (25,000)
Amount subject to interest = 100,000 x 10%/12 x 360/30 = 10,000
Cost to company = 30,000 + 10,000 = 40,000
Less: Expenses saved due to outsourcing (24,000)
Net cost = $16,000
Net cost/average amount invested = $16,000 / $100,000 = 16%
My question is why do we by 10% by 12 months when calculating the Amount subject to interest? Aren't we calculating the annual interest cost? Here is my calculation = 125,000 x 360/30 days = total gross AR x 80% = Net AR received x 10% annual interest rate = 120,000. I just don't get why we have to divide the interest rate by 12 months while we need to calculate the annual amount?