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Pledging Accounts Receivable

The Pledging Process

Second National Bank of Bryn Mawr is analyzing the accounts receivable ledger of Crowe Company, an educational publisher, to find acceptable collateral for a pledge or accounts receivable. Each of Crowe's accounts receivable, along with its age and average payment period, is given in Table 15W.2 (below). Because Crowe extends credit terms of 2/10 net 30 EOM, the bank eliminates from further consideration all accounts that are currently overdue (those whose age is greater than 30 days). This immediately eliminates the accounts of customers C, E, and I.

The second step in the bank's evaluation process is to analyze the historical payment patterns of the customers. After calculating the average payment period for each customer (given in the last column of Table 15W.2), Second National Bank decides to eliminate customer B, whose account, although not currently overdue, normally requires 60 days to collect. Having eliminated the accounts of customers B, C, E, and I, the bank is left with $45,000 of acceptable accounts from customers A, D, F, G, and H (who owe $10,000, $4,000, $6,000, $14,000, and $11,000, respectively). Crowe Company therefore has $45,000 of acceptable accounts receivable collateral. Each account that is used as collateral is marked in Crowe Company's ledger, and a list of the billing dates and amounts is kept by the bank.

TABLE 15W.2: Crowe Company's Accounts Receivable
Customer Account receivable Agea Average payment period
A $10,000 20 days 35 days
B 8,000 5 60
C 15,000 50 45
D 4,000 14 30
E 3,000 70 60
F 6,000 10 20
G 14,000 3 10
H 11,000 23 10
I 3,000 45 45
aNumber of days since the beginning of the credit period.

Adjusting the Dollar Value of Selected Accounts Receivable

The $45,000 of acceptable accounts receivable selected by Second National Bank of Bryn Mawr from Crowe Company's books must be adjusted for returns and allowances. The bank decides, after evaluating the company's accounts, that a 5 percent adjustment is appropriate. After this adjustment Crowe Company has acceptable collateral of $42,750 [$45,000 x (1 - .05)].

Applying the Percentage to Be Advanced

After a reexamination of Crowe Company's acceptable accounts receivable and general operations, Second National Bank of Bryn Mawr decides to advance 85 percent of the value of the adjusted acceptable collateral. This means that the bank will lend the company about $36,338 (42,750 x .85).

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