A. This answer deducts an entire year of interest and ignores the reserve and commission. See the correct answer for a complete explanation.

B. This answer charges an entire year's interest on the amount that is to be paid (loaned) to the seller of the receivables. Because the receivables are only 180 day receivables, only one-quarter of the annual interest should be deducted. See the correct answer for a complete explanation.

C. The amount that is going to be received is going to be calculated by starting with the amount of the receivable itself, $100,000. This will be reduced by the reserve and the commission, both of which are calculated from the $100,000 amount. In total, this is 7% and reduces the amount to $93,000. This is the amount on which the interest will be charged. The interest rate is 10% and this gives an annual interest of $9,300. However, the time period before the receivable is due to be collected is only 3 months, so only 1/4 of the annual interest will be charged. This is $2,325. This is also withheld from the amount received and brings the amount received down to $90,675. If all of the receivables are actually collected when they become due, the company will receive an additional $6,000 that was withheld as the reserve. In fact, any amount collected in excess of $94,000 will be received by the company that sold the receivables.

D. This answer does not take into account the interest that is charged on the amount to be paid to the seller. See the correct answer for a complete explanation.