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Pledging Accounts Receivables

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2. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 40 percent tax bracket.

a. Compute the incremental income after taxes.
b. What will Johnson's incremental return on sales be if these new credit customers are accepted?
c. If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be?

3. Cats Copiers, Inc. shows the following values on its corporate books.
Corporate Books

Initial amount $ 10,000
Deposits +100,000
Checks - 45,000
Balance $ 65,000

The initial amount on the bank's books is $20,000. Only $85,000 in deposits have been recorded and only $18,000 in checks have cleared. Fill in the following table and indicate the amount of float.

Bank's Books

Initial amount $20,000
Deposits
Checks _______
Balance
Float

4. What is the difference between pledging accounts receivable and factoring accounts receivable?

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Pledging Accounts Receivables
Accounts receivables represent the money owed to a business from credit sales to customers. Accounts receivable can also be used as a way of short term financing if it is used as collateral for a loan. This is known as the pledging of the accounts receivable. The value of receivable depends on the credit worthiness of the organization's customer. The ...

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