For the year just ended, James' Drafting Supplies had average accounts receivable of $880,000 and total credit sales of $4,800,000. Throughout the year, a factor purchased accounts receivable
From the ﬁrm at a 2% discount. What was the ﬁrm's effective interest rate paid on its receivables
ﬁnancing?

Question

Quizplus · Accepted Answer

The effective interest rate paid on receivables financing is calculated as follows:Effective interest rate = (Discount rate / (1 - Discount rate)) * (360 / Collection period)Discount rate = 2%Collection period = Average accounts receivable / Total credit sales * 360Collection period = $880,000 / $4,800,000 * 360Collection period = 60 daysEffective interest rate = (2% / (1 - 2%)) * (360 / 60)Effective interest rate = 11.6%

For the Year Just Ended, James' Drafting Supplies Had Average