Question

Charmin Paper Company sells to the 12 accounts listed next.

   

Account	Receivable Balance Outstanding			Average Age of the Account Over the Last Year
A	$	63,400			29
B		165,000			43
C		77,300			12
D		21,600			55
E		50,000			42
F		297,000			38
G		32,200			26
H		349,000			69
I		40,100			34
J		98,500			50
K		229,000			23
L		63,000			31

  

    Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.

  

    The current prime rate is 16.50 percent, and Capital charges 4.50 percent over prime to Charmin as its annual loan rate.

  

a.	Determine the maximum loan for which Charmin Paper Company could qualify.

  

Maximum loan amount

$

  

b.	Determine how much one month’s interest expense would be on the loan balance determined in part a. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

      

Interest expense

$

Answer 1

a).

0 - 30 days Amount

A $63,400

C 77,300

G 32,200

K 229,000

Total $401,900

Loan % 90%

Loan $361,710

31 - 40 days   Amount

F $297,000

I 40,100

L 63,000

Total $400,100

Loan % 80%

Loan     $320,080

41 - 45 days   Amount

B $165,000

E 50,000

Total $215,000

Loan % 70%

Loan     $150,500

Maximum Loan = $361,710 + $320,080 + $150,500 = $832,290

b). Loan Balances $832,290

Interest,21% annual

(16.5% Prime + 4.5%) 1.75%(=21%/12)

One month's interest $14,565.08