Concept explainers
a)
To determine: The annual financing cost.
a)
Explanation of Solution
Computation:
Hence, the annual financing cost is 11.67%.
b)
To determine: The annual financing cost.
b)
Explanation of Solution
Computation:
Hence, the annual financing cost is 10.56%.
c)
To determine: The annual financing cost.
c)
Explanation of Solution
Computation:
Hence, the annual financing cost is 10%.
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Chapter 16 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
- On December 1 of the current year, Jordan Inc. assigns 125,000 of its accounts receivable to McLaughlin Company for cash. McLaughlin Company charges a 750 service fee, advances 85% of Jordans accounts receivable, and charges an annual interest rate of 9% on any outstanding loan balance. Prepare the related journal entries for Jordan.arrow_forwardA customer was unable to pay the accounts receivable on time in the amount of $34,000. The customer was able to negotiate with the company and transferred the accounts receivable into a note that includes interest, along with an up-front cash payment of $6,000. The note maturity date is 24 months with a 15% annual interest rate. What is the entry to recognize this transfer?arrow_forwardOn December 1 of the current year, Jordan Inc. assigns 125,000 of its accounts receivable to McLaughlin Company for cash. McLaughlin Company charges a 750 service fee, advances 85% of Jordans accounts receivable, and charges an annual interest rate of 9% on any outstanding loan balance. Prepare the related journal entries for Jordan. Refer to RE6-10. On December 31, Jordan Inc. received 50,000 on assigned accounts. Prepare Jordans journal entries to record the cash receipt and the payment to McLaughlin.arrow_forward
- Spath Company borrows 75,000 by issuing a 4-year, noninterest-bearing note to a customer on January 1, 2019. In addition, Spath agrees to sell inventory to the customer at reduced prices over a 5-year period. Spaths incremental borrowing rate is 12%. The customer agrees to purchase an equal amount of inventory each year over the 5-year period so that a straight-line method of revenue recognition is appropriate. Required: Prepare the journal entries on Spaths books for 2019 and 2020. (Round answers to 2 decimal places.)arrow_forwardOn June 1, Phillips Corporation sold, with recourse, a note receivable from a customer to a bank. The note has a face value of 15,000 and a maturity value (principal plus interest) of 15,400. The discount is calculated to be 385, and the accrued interest income is 100. The recourse liability is estimated to be 1,000. Prepare the journal entry of Phillips to record the sale of the note receivable.arrow_forwardJason Industries has a line of credit at Bank Lucas that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borrowed $800,000 during the year under the agreement. Show Solutions and Explanation. Calculate the effective annual rate on the firm’s borrowing in each of the following circumstances: A. The firm normally maintains no deposit balances at Bank Lucas (Format: 11.11%) B. The firm normally maintains $70,000 in deposit balances at Bank Lucas. (Format: 11.11%) C. The firm normally maintains $150,000 in deposit balances at Bank Lucas. (Format: 11%)arrow_forward
- White Corporation has entered into an agreement to transfer accounts receivable to Murphy Company. Under the terms of this agreement, White receives 80% of the value of all the transferred accounts receivable (to reflect credit risk) and is charged a 1% service charge, which is based upon the dollar amount of transferred receivables. Interest is charged at an annual interest rate of 12% of any outstanding loan balance. The transferred receivables will continue to be collected by White with any cash flows being remitted to Murphy at the end of each month. White is not allowed to transfer the receivables to anyone else. White normally transfers its accounts receivable. The following selected 2019 transactions relate to this agreement: Dec 1 Accounts receivable of $160,000 are transferred. 11 A sales return of $1,000 on a transferred account is made. 31 Collections are made on $82,000 of the transferred accounts receivable plus interest for the month of December. This amount is…arrow_forwardGuru Corporation found itself running out of cash to pay for its currently due liabilities, and resorted to use its receivables as a source of financing. The following transactions occurred: • The entity assigned 80% of their accounts receivable on November 2 on a notification basis. The total amount of receivable at that time is ₱1,000,000, and the proceeds of the loan is 75% of the amount assigned. • The term of the agreement includes a 1% per month interest rate every end of the month and the proceeds from the collection of account is applied first to the interest for the month. • The bank provided notifications on November 30 and December 31. The collections made by the bank on November 30 is 40% of the accounts assigned, and the collections on December 31 is 50% of the accounts assigned. The bank remitted a check on December 31 with the notification. • The entity had credit sales of ₱550,000 from November 2 to December 31. Sales returns during the same period is ₱2,000.…arrow_forwardSummit Record Company is negotiating with two banks for a $134, 000 loan. Fidelity Bank requires a compensating balance of 18 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 9 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $134,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a-2. Which loan should Summit accept? multiple choice 1 Southwest Bank Correct Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $ 24, 120 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input…arrow_forward
- Cumberland Furniture wishes to establish a prearranged borrowing agreement with its local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalentrevolving credit agreement, the rate is 2.80% over prime with a commitment feeof 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use. What is the effective annual rate under the line of credit? b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively have used of.) If the firm does expect to borrow…arrow_forwardGuru Corporation found itself running out of cash to pay for its currently due liabilities, and resorted to use its receivables as a source of financing. The following transactions occurred:• The entity assigned 80% of their accounts receivable on November 2 on a notification basis. The total amount ofreceivable at that time is ₱1,000,000, and the proceeds of the loan is 75% of the amount assigned.• The term of the agreement includes a 1% per month interest rate every end of the month and the proceeds from the collection of account is applied first to the interest for the month.• The bank provided notifications on November 30 and December 31. The collections made by the bank on November 30 is 40% of the accounts assigned, and the collections on December 31 is 50% of the accounts assigned. The bank remitted a check on December 31 with the notification.• The entity had credit sales of ₱550,000 from November 2 to December 31. Sales returns during the same period is ₱2,000. Collections on…arrow_forwardGuru Corporation found itself running out of cash to pay for its currently due liabilities, and resorted to use its receivables as a source of financing. The following transactions occurred:• The entity assigned 80% of their accounts receivable on November 2 on a notification basis. The total amount ofreceivable at that time is ₱1,000,000, and the proceeds of the loan is 75% of the amount assigned.• The term of the agreement includes a 1% per month interest rate every end of the month and the proceeds from the collection of account is applied first to the interest for the month.• The bank provided notifications on November 30 and December 31. The collections made by the bank on November 30 is 40% of the accounts assigned, and the collections on December 31 is 50% of the accounts assigned. The bank remitted a check on December 31 with the notification.• The entity had credit sales of ₱550,000 from November 2 to December 31. Sales returns during the same period is ₱2,000. Collections on…arrow_forward
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