Accounts receivable as collateral Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customer’s average payment period. Springer’s accounts receivable, their average ages, and the average payment period for each customer are shown in the following table. The company extends terms of net 30 days.
|
|
Account |
Average age |
Average payment |
|
Customer |
receivable |
of account |
period of customer |
|
A |
$20,000 |
10 days |
40 days |
|
B |
6,000 |
40 |
35 |
|
C |
22,000 |
62 |
50 |
|
D |
11,000 |
68 |
65 |
|
E |
2,000 |
14 |
30 |
|
F |
12,000 |
38 |
50 |
|
G |
27,000 |
55 |
60 |
|
H |
19,000 |
20 |
35 |
a. Calculate the dollar amount of acceptable accounts receivable collateral held by Springer Products.
b. The bank reduces collateral by 10% for returns and allowances. What is the level of acceptable collateral under this condition?
c. The bank will advance 75% against the firm’s acceptable collateral (after adjusting for returns and allowances). What amount can Springer borrow against these accounts?