Question

In: Accounting

Factor Financing The operation of your business resulted in Sales of $610,000 last year. Your year-end...

Factor Financing

  • The operation of your business resulted in Sales of $610,000 last year.
  • Your year-end AR are $150,000.
  • You are considering factoring AR to raise cash to help finance your venture’s growth.
  • The factoring company imposes 6% discount and charges additional 2% for each expected 15-day average collection period over 40 days.
  1. Calculate the dollar amount you would receive from the factoring company for your AR, if your collection period is 40 days or less.
  2. Calculate the dollar amount you would receive from the factor for your AR, if your average collection period is 70 days.
  3. Show how your answer in Part B would change, if the factoring company charges 8% discount plus additional 1.5% for each expected 10-day average collection period over 40 days. The actual collection period is the same as in Part B.
  4. Calculate average collection period, if $610,000 in Sales last year was evenly distributed throughout the year with average $150,000 in AR.     
  5. Using the results from Part D, and given the original terms stated in Part A of the question, calculate the dollar amount you would receive for your AR from the factoring company.

Solutions

Expert Solution

A. Year end receivable balance = $150,000

Discount = 6% upto 40 days

Hence, amount received = 150000*94% = 141,000

B. Year end receivable balance = $150,000

Collection period = 70 days

For each 15 day increase over 40 days, an additional 2% is charged. Thus, 4% extra discount will be charged for 30 days.

Hence, total discount = 6% + 4% = 10%

Hence, amount received = 150000*90% = $135,000

C. Year end receivable balance = $150,000

Collection period = 70 days

Normal discount rate upto 40 days = 8%

Additonal discount = 1.5% for every 10 days.

Hence, additonal discount = 4.5%

Total discount = 4.5%+8% = 12.5%

Hence amount received = 150000*87.5% = $131,250

D. Average collection period = 365/ Accounts receivable turnover ratio

Accounts receivable turnover ratio = Net credit sales/Average receivables = 610,000/150,000 = 4.067

Average collection period = 365/4.067 = 89.74 days or 90 days (rounded off)

E.

Year end receivable balance = $150,000

Collection period = 90 days

Normal discount rate upto 40 days = 6%

Additonal discount = 2% for every 15 days.

Hence, additonal discount = 8% [For extra 50 days]

Total discount = 8%+8% = 16%

Hence amount received = 150000*84% = $126,000

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