Question

1. Popper Enterprises factors $700,000of its accounts receivables to Third Bank with recourse for a finance charge of 4?%. The finance company retains an amount equal to? 7% of the accounts receivable for possible adjustments. Third Bank will return the hold back to Popper when it collects the receivables. In? addition, the fair value of the recourse liability is estimated at? $20,000. What amount of cash would Popper receive as a result of this? transaction?

A. $623,000 B. $665,000 C. $680,000 D. $700,000

2. Which ratio indicates the effectiveness of a? company's credit extension? policy?

A. inventory turnover B. accounts payable turnover C. days inventory on hand D. days sales outstanding

3. What type of account is Discount on Note? Receivable?

A. asset B. contra?revenue C. revenue D. contra?asset

Answer 1

• All working forms part of the answer
• Answer 1

Account receivables factored = $ 700,000
Recourse Liability = $ 20,000
Due from Factor Third Bank = 700000 x 7% = $ 49,000
Loss from Factoring = (700000 x 4%) + 20000 recourse liability = $ 48,000

Amount of cash received as a result of this factoring transaction = Accounts receivables factored + Recourse Liability – Loss on factoring – Due from factor.

= 700000 + 20000 – 49000 – 48000 = $ 623,000

CORRECT ANSWER = Option ‘A’ $ 623,000

• Answer 2

Correct Answer is Option ‘D’ Days Sales outstanding tells the effectiveness of a company’s credit extension policy.

This is because “Days Sales Outstanding” indicates how many days credit sale went ‘unpaid’ or on ‘credit’.

• Answer 3

The Correct Answer is Option ‘D’; Contra Asset Account. Discount on Notes Receivables is a ‘contra assert account’.

Notes receivables are assets and have debit balances, while Discount on Notes receivables have credit balances which is shown as a reduction from Notes Receivables balance on Balance Sheet.

Also, Discount on Notes Receivables credit balance is amortised each year with Interest revenue over the life of the Note Receivables.