Problem 21-5 (AICPA Adapted)

Cynthia Company factored P750,000 of accounts receivable at year-end. Control was surrendered. The
factor accepted the accounts receivable subject to recourse for nonpayment.

The factor assessed a fee of 2% and retained a holdback equal to 4% of the accounts receivable.

In addition, the factor charged 12% interest computed on a weighted-average time to maturity of fifty-
one days. The fair value of the recourse obligation is P15,000.

1. What is the amount of cash initially received from the factoring?

a. 692,425

b. 720,000

c. 722,425

d. 705,000

Solution:

Accounts Receivable 750,000

Factors holdback (750,000x4%) (30,000)

Factors fee (750,000x2%) (15,000)

Interest (750,000x12%x51/365) (12,575)

692,425

2. Assuming all accounts receivable are collected, what is the cost of factoring the accounts
receivable?

a. 12,575

b. 15,000

c. 27,575

d. 42,575

Solution:

Factoring fee 15,000

Interest 12,575

Total cost of factoring 27,575

Zeus Company factored P6,000,000 of accounts receivable to a finance entity at the end of the current
year. Control was surrendered by Zeus Co.

The factor assessed a fee of 3% and retained a holdback equal to 5% of the accounts receivable.

In addition, the factor charged 15% interest computed on a weighted average time to maturity of the
accounts receivable of 54 days.

1. What is the amount of cash initially received from the factoring?

a. 5,296,850

b. 5,386,850

c. 5,476,850

d. 5,556,850

Solution:

Accounts Receivable 6,000,000

Factors holdback (750,000x4%) (300,000)

Factors fee (750,000x2%) (180,000)

Interest (750,000x12%x51/365) (133,150)

5,386,850

2. If all accounts are collected, what is the cost of factoring the accounts receivable?

a. 313,150

b. 180,000

c. 433,150

d. 613,150

Solution:

Factoring fee 180,000

Interest 133,150

Total cost of factoring 313,150