Detailed Answer
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 × 6%) (6,000 Less: factor fee ($100,000 × 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 × 15
Annualized interest expense $13,890 Times: portion of year (60 days ÷ 360 days) × 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 $90,285