Question

Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customer’s average payment period. Springer’s accounts receivable, their average ages, and the average payment period for each customer are shown in the following table. The company extends terms of net 30 days.

Customer Account receivable Average age of account Average payment period of customer

A $37,000 40 days 30 days

B 42,000 25 50

C 15,000 40 60

D 8,000 30 35

E 50,000 31 40

F 12,000 28 30

G 24,000 30 70

H 46,000 29 40

I 3,000 30 65

J 22,000 25 35

K 62,000 35 40

L 80,000 60 70

a. Calculate the dollar amount of acceptable accounts receivable collateral held by Springer Products.

b. The bank reduces collateral by 10% for returns and allowances. What is the level of acceptable collateral under this condition?

c. The bank will advance 75% against the firm’s acceptable collateral (after adjusting for returns and allowances). What amount can Springer borrow against these accounts?

Answer 1

Part a)

The dollar amount of acceptable accounts receivable is determined as below:

Customer	Average Age of Account	Average Payment Period of Customer	Amount
B	25	50	42,000
C	40	60	15,000
D	30	35	8,000
E	31	40	50,000
F	28	30	12,000
G	30	70	24,000
H	29	40	46,000
I	30	65	3,000
J	25	35	22,000
K	35	40	62,000
L	60	70	80,000
		Dollar Amount of Acceptable Accounts Receivables as Collateral	$364,000

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Part b)

The level of acceptable collateral with 10% reduction for returns and allowances is calculated as below:

Level of Acceptable Collateral After Adjustment for Returns and Allowances = Dollar Amount of Acceptable Accounts Receivables as Collateral*(1-10%) = 364,000*(1-10%) = $327,600

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Part c)

The total amount that can be borrowed by Springer against these accounts is determined as below:

Total Amount Available for Borrowing = Level of Acceptable Collateral After Adjustment for Returns and Allowances*75% = 327,600*75% = $245,700