[vodrldnr]

Taylored Corp. factored $400,000 of accounts receivable to Rich Corp. on July 1, year 2. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for nonpayment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.
Assuming all receivables are collected, Taylored’s cost of factoring the receivables would be

$ 8,000
$34,740
$42,740
$14,740

(d) If all receivables are collected, Taylored would eliminate its recourse liability and the corresponding loss. The costs incurred by Taylored would include a fee of $8,000 ($400,000 × .02) and interest expense of $6,740 ($400,000 × .15 × 41/365) for a total of $14,740.

why denominator is 365???

I mean why it is assumed that the total time frame for interest rate is 365 in FAR problem ??

is it just how bank system works ???

sorry I am really dumb.

if it is APR

It ain't About How Hard You Hit

[Substantive Testing]

Because the interest rate they give is annualized (and most of the questions are), you have to divide it with 365 (number of days in a year) to come out with the percentage you paid/received during the time you hold it for. If the annual interest is 15% and you only held it for 41 days, then your effective interest rate is not 15% but (15%*41/365)= 1.68%
APR=Annual percentage rate.

Hope this helps you,

AUD - 75
BEC - 75
FAR - 81
REG - 78

 

CPA ex-auditor

 

[vodrldnr]

Substantial Assurance> thank you for checking my post .. help me plz.. I am lack of commonsense

so.. you said it is annualized. but How do I know that they annualized it ?? they don't mention about it on all problems

and

when I calculate 0.15 * 40,000 ( 41/ 365 ), is this effective interest rate ?? and if I take away 40,000, then it will give me effective interest rate ???

when accounting talks about interest rate, do they means annual interest rate ???

I haven't really paid attention to this thing .. but just all of sudden, it bothers me too much ..

It ain't About How Hard You Hit

[Substantive Testing]

You have to assume they give it to you in an annualized rate. (unless they state otherwise…maybe semi-annual rate)?
But let me tell you that every problem I have done on cram and in the test, they have always given me annualized rates.
I recommend you to always do the problem pretending the rate is annualized, and if there is an answer on the multiple choices, then that is it. If it there isnt, then you have to start thinking on plan B. I do not believe the AICPA is as evil as to give you 4 multiple choices of 4 different scenarios. I have not experienced that yet.
I should have been more clear, I for myself call it the real effective interest rate (Lol), because thats the real percentage that matters.

AUD - 75
BEC - 75
FAR - 81
REG - 78

 

CPA ex-auditor

 

[vodrldnr]

Substantial Assurance> Okay I will do that. I will just assume it is annual.

hey . although I do not know you in person (all I see is just raccoon face), thank you so much for answering my question always.

it helps me a lot. I won't miss your questions and will answerthem if I know the answer. thank you sooo much .

It ain't About How Hard You Hit

[Anonymous]

Just to give a 2nd voice, interest rates are always annual unless stated otherwise, which is the same way they're stated as a regular thing in normal business. If you go to the bank and they say the loan has 4.5% interest, they're meaning APR, annual percentage rate. If they say your bank account will learn 0.25% interest, they're meaning annually again. So, unless they specifically state that the interest rate itself is for a different term, it's always annual.

[Substantive Testing]

@vodrldnr, Once I become licensed, I might not be as active in this forum as I am now, and it will be your duty to help the next vodrldnr who is having nightmares about FAR. My major wasn't Accounting, and English is my third language, so if someone understands how you feel, you can count me in.

AUD - 75
BEC - 75
FAR - 81
REG - 78

 

CPA ex-auditor

 

[vodrldnr]

Substantial Assurance> thank you sooo much.. I am in the same boat. english is my third language… and I am not accounting major .. your help is so priceless for me. thank you soooo much..

It ain't About How Hard You Hit

[Author]

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