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Hello John, I know you don’t usually have a BPP kit so the question is as follow:
“A factor takes over receivables & debt collection of Joan Co for a fee of 0.5% of credit sales. A condition of the offer is that the factor will advance Joan 80% of the face value of its AR at interest rate of 1% above current O/D rate. Joan Co pays int on its O/D at an annual rate of 8%. The factor claims that it would reduce outstanding AR by 30% and reduce admin exp by 2% per year if the offer is accepted.
Other information:
annual AR = $3,800,000
annual Revenue = $ 15,600,000
admin exp = $1,000,000”
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In the answer, there’s a line which says…Interest on advance =2,660 x 0.8 x 0.01 =21.3I am confused as i thought it would have been 80% x $3,800,000 x 9%
Two separate things:
Firstly, if the factor is used then the receivables will fall by 30% which means that they will be 70% x 3800000 = 2,600,000
Secondly, there is more than one way of setting out the answer (both of which give the same final result in terms of the net gain or loss).
The actual interest charge by the factor will be 0.8 x 2660 x 9%
However, BPP’s answer is looking at the extra interest that would have to be paid (if using the factor) which will be 0.8 x 2660 x 1%Ok, i see where i misunderstood the question…….the part saying “the factor will advance Joan 80% of the face value of its AR”. the “its AR” is the AR which the factor has taken over which is 70% of $3,800 which in turn gives 80% x 70% x $3,800 x 9%.
Thanks for clearing that up John.
If we do it as 0.8??2660??90%
That would result in a different final result ie net cost
Which is different from the kit answerYes it does – you need to read my earlier reply carefully about two ways of doing it (and watch the free lecture on factoring).
Dear John do you think you could redo Nari’s question from the beginning? You explain in detain and well so it’s easy to understand. Thanks
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