Fastmart Retail Company

Receivables Financing Comparison

Fastmart the following Balance Sheet on January 1:

Assets		Liabilities and equity
Cash	30,000	Accounts payable	70,000
Accounts Receivable	300,000
Inventory	90,000	Inventory loan	80,000
Current Assets	420,000	Mortgage payable current	50,000
		Current liabilities	200,000
Plant and equipment	500,000	Mortgage payable-non current	200,000
Accumulated Depreciation	-200,000	Total liabilities	400,000
Total Assets	720,000	Common stock	100,000
		Retained earnings	220,000
		Total liabilities and equity	720,000

1. Calculate the existing current ratio and debt to assets ratio.

Fastmart is in need of cash and is considering two alternatives for converting its accounts receivable to cash.

2. Alternative A

Supermart borrows $250,000 by assigning all of its accounts receivables on January 1. There is a 2% origination fee based on receivables financed and the interest charge is 1% of the average accounts receivable balance each month. Fastmarts customers will pay the amounts they owe directly to the finance company. Fastmart sets up a $10,000 allowance for bad debts since it will be responsible for the bad debts

Transactions are as follows:

Facts	January	February
Payments	150,000	135,000
Discounts for early payment	1,500
Returns	2,500	1,000
Write-offs of bad debts		8,000

1. Record the loan.
2. Prepare a balance sheet that reflects your entry above. Adjust retained earnings for any impact on income.
3. Calculate the current ratio and assets to debt ratio after the borrowing
4. Record all remaining transactions for January and February (T accounts are suggested)

3. Alternative B

Eastmart sells its accounts receivable to the finance company with recourse. The finance company charges a 3% fee based on receivables and withholds an allowance of 6% to cover sales returns and sales discounts and uncollectible accounts Eastmart estimates that its bad debts will be $10,000

Transactions are as follows:

Facts	January	February
Payments	150,000	135,000
Discounts for early payment	1,500
Returns	2,500	1,000
Write-offs of bad debts		8,000

a Record the sale of the receivables

b Prepare a balance sheet that reflects your entry above. Adjust retained earnings for any impact on income. Be sure to adjust the original balance sheet (prior to assignment of factoring).

3. Calculate the current ratio and assets to debt ratio after the sale of the receivables
4. Record all remaining transactions for January and February (T accounts are suggested)