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Answer (A) is correct . The first step is to calculate the gross proceeds the firm will receive from the factoring transaction: Company A Company B Company C Company D Amount of receivable $100,000 $100,000 $100,000 $100,000 Less:? reserve (6,000) (7,000) (5,000) (8,000) Less:? factor fee (1,400) (1,200) (1,700) (1,000) Gross proceeds $? 92,600 $? 91,800 $? 93,300 $? 91,000 ? These amounts must be reduced by the interest charged on gross proceeds: Gross proceeds $? 92,600 $? 91,800 $? 93,300 $? 91,000 Times:? annual finance charge ¡Á??????15% ¡Á??????12% ¡Á??????20% ¡Á????????5% Annualized interest exp. $??13,890 $??11,016 $??18,660 $????4,550
Answer (B) is incorrect because Company B will produce proceeds of only $89,964.
Answer (C) is incorrect because Company C will produce proceeds of only $90,190.
Answer (D) is incorrect because Company D will produce proceeds of only $90,242.