P15–16 Accounts receivable as collateral Kansas City Castings (KCC) is attempting to obtain the maximum loan possible using accounts receivable as collateral. The firm extends net-30-day credit. The amounts that are owed KCC by its 12 credit customers, the average age of each account, and the customer’s average payment period are as shown in the following table.

a. If the bank will accept all accounts that can be collected in 45 days or less as long as the customer has a history of paying within 45 days, which accounts will be acceptable? What is the total dollar amount of accounts receivable collateral?
(Note: Accounts receivable that have an average age greater than the customer’s average payment period are also excluded.)

b. In addition to the conditions in part

a, the bank recognizes that 5% of credit sales will be lost to returns and allowances. Also, the bank will lend only 80% of the acceptable collateral (after adjusting for returns and allowances). What level of funds would be made available through this lending source?

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Customer Account receivable Average age of account Average payment period of customer A $37,000 40 days 30 days B 42,000 25 50 C 15,000 40 60 8,000 30 35 E 50,000 31 40 F 12,000 28 30 G 24,000 30 H 46,000 29 I 3,000 30 J 22,000 25 KL K 62,000 35 80,000 60 R&R 70 40 65 35 40 70