Question

Charming Paper Company sells to the 12 accounts listed here.   
  

Account	Receivable Balance Outstanding			Average Age of the Account Over the Last Year
A	$	66,800			25
B		154,000			42
C		77,800			14
D		21,800			56
E		52,100			42
F		254,000			35
G		35,600			20
H		392,000			66
I		44,100			38
J		92,800			58
K		263,000			23
L		68,900			36

    
Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less, 80 percent for account balances between 31 and 40 days, and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.
    
The current prime rate is 16.50 percent, and Capital charges 4.50 percent over prime to Charming as its annual loan rate.

a. Determine the maximum loan for which Charming Paper Company could qualify.
  

  
  
b. Determine how much one month’s interest expense would be on the loan balance determined in part a. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Answer 1

Parta: Maximum Loan which can be availed

We need to first sort the receivable outstanding based on the average days outstanding and figure out the % of financing which can be availed against each receivable. based on the rules given.

Then, calculate the Loan Available against each receivable by multiplying the receivable outstanding with the % of financing which can be availed agaisnt that receivable

Loan Available against Receivable = Receivable Outstanding x % of financing available

The calculation are shown in the table below:

Account	Receivable Outstanding	Average Age	% of financing availble	Loan available against receivable
A	66,800	25	90%	60,120
B	154,000	42	70%	107,800
C	77,800	14	90%	70,020
D	21,800	56	0%	0
E	52,100	42	70%	36,470
F	254,000	35	80%	203,200
G	35,600	20	90%	32,040
H	392,000	66	0%	0
I	44,100	38	80%	35,280
J	92,800	58	0%	0
K	263,000	23	90%	236,700
L	68,900	36	80%	55,120
Total				836,750

Hence, the maximum loan which can be availed is $ 836,750

Partb: Monthly Interest Expense

Amount of Loan = $ 836,750

Interest Rate = Prime Rate + Capital Charges = 16.5% + 4.5%

Interest Rate = 21.0%

Interest = Loan Amount x Interest Rate x No. of Days / 365

Assuming a 30 day month, the monthly interest would be:

Monthly Interest = 836,750 x 21% x 30 / 365

Monthly Interest = $ 14,442.53 ....Answer

Assuming a 31 day month, the monthly interest would be:

Monthly Interest = 836,750 x 21% x 31 / 365

Monthly Interest = $ 14,923.95 ....Answer