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Answer (C) is correct . The first step is to calculate the gross proceeds the firm will receive from the factoring transaction: Amount of receivable $100,000 Less:? reserve ($100,000 ¡Á 6%) (6,000) Less:? factor fee ($100,000 ¡Á 1.4%) (1,400) Gross proceeds $ 92,600 ? This amount must be reduced by the interest charged on the gross proceeds: Gross proceeds $92,600 Times:? annual finance charge ¡Á????15% Annualized interest expense $13,890 Times:? portion of year (60 days ¡Â 360 days) ¡Á?16.7% Interest expense $? 2,315 The actual cash the firm will receive from this factoring transaction is thus calculated as follows: Gross proceeds $92,600 Less:? interest expense (2,315) Net proceeds $90,28
Answer (A) is incorrect because The amount of $92,600 results from failing to consider the interest expense.
Answer (B) is incorrect because The amount of $96,135 results from failing to subtract the 6%?reserve.
Answer (D) is incorrect because The amount of $85,000 assumes that the only amount withheld is a full year’s interest on $100,000.