Accounts receivable financing (LO1) Charmin Paper Company sells to the 12 accounts listed next. Account Receivable Balance Outstanding Average Age of
the Account over the Last Year
A $ 60,800 22
B 168,000 43
C 78,300 19
D 24,300 55
E 58,900 42
F 238,000 39
G 30,400 16
H 374,000 72
I 41,400 32
J 96,500 58
K 292,000 17
L 67,700 37
Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less, 80 percent for account balances between 31 and 40 days, and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan. The current prime rate is 9.50 percent, and Capital charges 3.50 percent over prime to Charming as its annual loan rate.
a. Determine the maximum loan for which Charmin Paper Company could qualify.
b. Determine how much one month’s interest expense would be on the loan balance determined in part a.

Charmin Paper Company

a. The maximum loan for which Charmin Paper Company could qualify is:

= $851,860

b. One month's interest expense on the loan balance determined in part a would be:

= $9,228.48

Explanation:

a) Data and Calculations:

Account Receivable                 Average Age of

Balance Outstanding   the Account over the Last Year

A     $ 60,800                                 22

B       168,000                                 43

C        78,300                                  19

D       24,300                                  55

E       58,900                                  42

F    238,000                                   39

G     30,400                                    16

H   374,000                                   72

I       41,400                                    32

J    96,500                                    58

K 292,000                                     17

L    67,700                                    37

Lending by Capital Financial Corporation:

Average age           Percentage

<=30 days                    90%

31-40 days                   80%

41-45 days                   70%

above 45 days              0%

<=30 days                    90%

A     $ 60,800              22

C        78,300               19

G       30,400               16

K    292,000               17

Total = $461,500 * 90% = $415,350

41-45 days                   70%

B       168,000              43

 E       58,900               42

Total = $226,900 * 70% = $158,830

31-40 days                   80%

F    238,000                39

 I        41,400                 32  

L      67,700                 37

Total = $347,100 * 80% = $277,680

Total amount that Capital can extend = $851,860

Prime rate = 9.50%

Capital charges over prime = 3.50%

Total interest charge = 13%

Annual Interest expense = $110,742 ($851,860 * 13%)

One month's interest expense = $9,228.48 ($110,742/12)