A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10%. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company?
A. $93,000
B. $90,000
C. $83,000
D. $90,675
Face amount of accounts receivable factored = $100,000
Less: 6% reserve = .06 x $100,000 = $6,000
Less: 1% commission = .01 x $100,000 = $1,000
Net: 93,000
Less: 10% interest = .10 x $93,000 x (90 / 360) = 2,325
Proceeds: $ 90,675
I understand the math, but what I don't get is why we use annual interest rates for reserves and commissions but not for the interest charged on the factored AR. Thoughts?
4 for 4
FAR 85
AUD 94
BEC 86
REG 90
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