Popper Enterprises factors $500,000 of its accounts receivable to Third Bank with recourse for a finance charge of 6%. The finance company retains an amount equal to 7% of the accounts receivable for possible adjustments. Third Bank will return the hold back to Popper when it collects the receivables. In addition, the fair value of the recourse liability is estimated at $20,000. What amount of cash would Popper receive as a result of this transaction?

Question

Quizplus · Accepted Answer

Popper receives cash after deducting the finance charge (6% of $500,000 = $30,000) and the holdback (7% of $500,000 = $35,000) from the total receivables. Thus, the cash received is $500,000 - $30,000 - $35,000 = $435,000. The recourse liability does not affect the cash received.

Popper Enterprises Factors $500,000 of Its Accounts Receivable to Third