A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm's average collection period is one month. What is the dollar cost of the factoring service?
A) $3,000
B) $4,500
C) $3,750
D) $4,250

Question

Quizplus · Accepted Answer

To calculate the cost of factoring, we need to first find the amount of money the firm would have received if it had collected its accounts receivable without factoring.

Since the average collection period is one month, we can assume that the firm would have collected $125,000 in one month had it not factored its receivables.

However, because the firm factored its receivables at a 3% discount, it only received $125,000 - 3%*$125,000 = $121,250.

Therefore, the dollar cost of the factoring service is $125,000 - $121,250 = $3,750.

Hence, the best choice is C).

A Firm Sells $125,000 of Its Accounts Receivable to Factors