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Dear John,
Thank you very much for your notes and videos, I’ve been able to solve most of the questions I’ve been practicing.
I do have this small problem. In the June 2015 exam paper, question 3, I don’t quite understand what this statement means:
“A condition of the factoring agreement is that the company would also advance Widnor Co. 80% of the value of invoices raised at an interest rate of 7% per year”.
The answer solved this as $2,600,695 x 80% x (0.07-0.05)
Why was the short term finance cost of 5% deducted from the invoice interest rate of 7%? I was thinking these costs should be accounted for individually. Please explain.
You will arrive at the same final answer whether you just bring in the extra 2% or whether you show the full 7% as a cost and the full 5% as a saving.
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