Question

The September 30, 2018 balance sheet of ABC Corporation disclosed the following information relating to its receivables:

Accounts Receivable (net of $18,000 allowance)

$342,000

ABC prepares quarterly financial statements. The following occurred during the fourth quarter of 2018:

1. During the 4th quarter, ABC had credit sales of $2,600,000 and collections on accounts receivable (general) of $2,300,000. Uncollectible accounts totaling $19,000 were written off, and a $2,600 accounts receivable previously written off was collected (not included in the $2,300,000 of cash collections reported above.)

2. On November 1, ABC assigned $300,000 of accounts receivable to Quicken Finance on a non-notification basis. Quicken advanced ABC cash proceeds for 85% of the accounts assigned, less a finance fee of $5,000, in exchange for an interest-bearing note. The note incurs interest at 1% per month on the outstanding loan balance. Cash collections from these assigned accounts are to be remitted monthly to Quicken Finance and include accrued interest (i.e. the cash collected each month must be used to repay both principal and interest on the note.)

*During November, ABC collected $150,000 on assigned accounts. ABC also accepted sales returns of $2,000. The November collections were remitted to Quicken on November 30th and included accrued interest for the month.

*During December, ABC wrote off $3,000 of assigned accounts as uncollectible. By December 31st, assigned accounts of $80,000 were collected in cash. These cash collections were remitted to Quicken Finance on December 31, 2018, and included accrued interest for December.

3. On December 31, 2018, ABC estimates 5% of total accounts receivable and accounts receivable assigned to be uncollectible.  

a) Determine how much Interest Expense ABC would report on their quarterly income statement for the period 10/1 - 12/31/18 from the assigning transaction:

Answer 1

ACCOUNTS ASSIGNED ON 1 NOV.		$ 300000
FINANCED AMOUNT @ 85%		255000
LESS: FINANCE FEE		5000
PAID AMOUNT		250000
AMOUNT COLLECTED IN NOV.		$ 150000
INTEREST ACCRUED FOR NOV. @ 1% OF $ 255000		2550
AMOUNT REPAID TO QUIKEN FINANCE		$ 150000
COMPONENT
INTEREST	2550
PRINCIPAL	147450
OUTSTANDING LOAN BALANCE AT NOV. END
TOTAL LOAN AMOUNT	255000
LESS: PRINCIPAL REPAYMENT	147450
OUTSTANDING LOAN BALANCE AT NOV. END	107550
AMOUNT COLLECTED IN DEC.		$ 80000
INTEREST ACCRUED FOR DEC. @ 1% OF $ 107550		1075.50
AMOUNT REPAID TO QUIKEN FINANCE		$ 80000
COMPONENT
INTEREST	1075.50
PRINCIPAL	78924.50
OUTSTANDING LOAN BALANCE AT DEC. END
OUTSTANDING LOAN BALANCE AT NOV. END	107550.00
LESS: PRINCIPAL REPAYMENT	78924.50
OUTSTANDING LOAN BALANCE AT DEC. END	28625.50
INTEREST EXPENSE ABC WOULD REPORT ON THEIR QUARTERLY INCOME STATEMENT FOR THE PERIOD 10/1-12/31/18 FROM THE ASSIGNING TRANSACTION:
INTEREST EXPENSE FOR NOV. 18	$ 2550
INTEREST EXPENSE FOR DEC. 18	$ 1075.5
TOTAL INTEREST EXPENSE FOR THE QUARTER	$ 3625.5