Question

Crest Textiles, Inc. factors 500,000 of accounts receivable with Commercial Factors, Inc., on a without recourse basis. Crest Textiles transfers the receivable records to Commercial Factors, which will receive the collections. Commercial Factors assesses a finance charge of 3

1) 15,000
2) 500,000
3) 3%
4) Cannot be determined

Answer 1

Crest Textiles factors $500,000 in receivables with Commercial Factors at a 3% finance charge, resulting in a charge of $15,000.

Step-by-step explanation:

When Crest Textiles, Inc. factors $500,000 of accounts receivable to Commercial Factors, Inc., they are essentially selling their receivables at a discount to get immediate cash flow. Since this is done on a without recourse basis, Crest Textiles is not responsible if the receivables fail to be collected. Commercial Factors charges a finance charge of 3% for this service. To calculate the finance charge, multiply the amount of accounts receivable by the finance charge percentage:

1. Identify the total amount of accounts receivable being factored: $500,000.
2. Calculate the finance charge: $500,000 * 3% (0.03).

The finance charge would be $500,000 * 0.03 = $15,000.