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In part c of this it says to evaluate whether to factor the receivables or not,
It says that the factor would advance 80% of the FACE VALUE of receivables at an annual rate of 7%.
then do we take the face value frm BS of 4600*80%*2% or do we take the new level of receivables*80%*2%?You will take the new level of receivables.
But, be careful. An alternative way of calculating the extra interest is to say that every month we will be invoicing, and every month the factor will be advancing us 80% of the value.
So…..over the year, they will be advancing us in total 80% of the total credit sales. The factor takes 30 days to collect, and so the total interest over the year will be total credit sales x 2%(per year) x 30/365 (because they are charging 30 days interest on all the advances. It gives the same result as the examiners answer.
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