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	$	69,200			22
B		127,000			44
C		70,300			17
D		28,700			62
E		53,800			42
F		306,000			38
G		30,300			25
H		351,000			70
I		40,300			31
J		97,500			51
K		289,000			20
L		67,000			32

    
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 9.50 percent, and Capital charges 3.50 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

(a.) Calculation of Maximum Loan for which Charming Paper Company could qualify :

Receivables from 0-30 days = A + C + G + K

= 69200 + 70300 + 30300 + 289,000

= 458,800

Receivables from 31-40 days = F + I + L

= 306,000 + 40300 + 67000

= 413,300

Receivables 41 - 45 days = B + E

= 127,000 + 53800

= 180,800

Maximum Loan = (458800 * 90%) + (413,300 * 80%) + (180800 * 70%)

= 412,920 + 330,640 + 126560

= 870,120

(b.) Interest for 1 month = Princpal * (Annual Rate / 12)

= 870120 * (13% / 12)

= 9426.30