ExpertHard1 markMultiple Choice
CPA · Question 29 · Area II: Balance Sheet Accounts
Oakwood Corp. factored $500,000 of accounts receivable to Finance Co. under the following terms:<br/>- Finance Co. advances 85% of receivables factored<br/>- Finance Co. charges a 3% factoring fee<br/>- Finance Co. charges 12% annual interest on advances<br/>- The arrangement is without recourse<br/>- Average collection period is 45 days<br/><br/>What is the total cost of factoring that Oakwood should recognize?
Oakwood Corp. factored $500,000 of accounts receivable to Finance Co. under the following terms:<br/>- Finance Co. advances 85% of receivables factored<br/>- Finance Co. charges a 3% factoring fee<br/>- Finance Co. charges 12% annual interest on advances<br/>- The arrangement is without recourse<br/>- Average collection period is 45 days<br/><br/>What is the total cost of factoring that Oakwood should recognize?
Answer options:
A.
$15,000
B.
$21,288
C.
$66,000
D.
$51,000
How to approach this question
Calculate total factoring cost as: (1) Factoring fee = receivables × fee rate, plus (2) Interest cost = advance amount × interest rate × (collection period ÷ 365 days). Sum both components for total cost.
Full Answer
B.$21,288✓ Correct
Factoring without recourse is a sale of receivables. The cost includes: (1) Factoring fee = $500,000 × 3% = $15,000, and (2) Interest on advance = $425,000 × 12% × (45/365) = $6,288. Total cost = $21,288. The factor assumes collection risk, so this is treated as a sale, not a secured borrowing.
Common mistakes
Omitting the interest component, using full-year interest instead of prorating for collection period, or applying rates to wrong base amounts
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