CA Intermediate · Financial Management and Strategic Management · Types of Financing
Aarav Traders has a ₹10,00,000 invoice portfolio. A factor advances 80% against it and charges a 12% p.a. interest on the amount advanced, for a credit period of 60 days. The interest is deducted upfront from the advance. Taking a 360-day year, what is the amount of interest deducted?
The interest deducted is ₹16,000. The factor advances 80% of ₹10,00,000, which is ₹8,00,000, and interest at 12% for 60 days on 360-day basis is 8,00,000 × 0.12 × 60/360. Charging on the full invoice would wrongly overstate the cost.
- A₹16,000Correct
- B₹19,200
- C₹20,000
- D₹1,20,000
Explanation
Advance = 80% of 10,00,000 = 8,00,000. Interest = 8,00,000 × 12% × 60/360 = 16,000. Using the full invoice value gives ₹20,000, which is wrong because interest is charged only on the advance. ₹19,200 results from using 72 days of interest, which is not given.
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