. Accounts receivable financing Charmin Paper Company sells to the 12 accounts l
ID: 2363765 • Letter: #
Question
. Accounts receivable financing Charmin Paper Company sells to the 12 accounts listed below. Account Receivable Balance Outstanding Average Age of the Account over the Last Year A $ 60,000 28 B 120,000 43 C 70,000 10 D 20,000 52 E 50,000 42 F 220,000 34 G 30,000 16 H 300,000 65 I 40,000 33 J 90,000 50 K 210,000 14 L 60,000 35 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 8.5 percent, and Capital charges 3.5 percent over prime to Charmin as its annual loan rate. a. Determine the maximum loan for which Charmin Paper Company could qualify. b. Determine how much one month's interest expense would be on the loan balance determined in part a.Explanation / Answer
Interest expense is the cost of debt that has occurred during a specified period of time. To illustrate interest expense under the accrual method of accounting, let’s assume that a company borrows $100,000 on December 15 and agrees to pay the interest on the 15th of each month beginning on January 15. The loan states that the interest is 1% per month on the loan balance. The interest expense for the month of December will be approximately $500 ($100,000 x 1% x 1/2 month). The interest expense for the month of January will be $1,000 ($100,000 x 1%). Since interest on debt is not paid daily, a company must record an adjusting entry to accrue interest expense and to report interest payable. Using our example above, at December 31 no interest was yet paid on the loan that began on December 15. However, the company did incur one-half month of interest expense. Therefore, the company needs to record an adjusting entry that debits Interest Expense $500, and credits Interest Payable for $500.
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