Reference no: EM132736011

You remain the senior financial analyst at Hospital ABC. A year later, Hospital ABC's board approved medical factoring for its remaining A/R in light of its immediate working capital needs and continuing cash shortfalls from many delayed and only partially paid insurer reimbursements. With your assistance, the Finance Department of Hospital ABC chose Financial Institution DEF for its medical factor. A recourse sale was agreed upon by both parties. DEF then computed a net collectible value (NCV) of 70 percent after historically comparing invoices issued by and invoices paid to Hospital ABC over the past 120 days (4 months).

Based on this NCV, Financial Institution DEF granted the following terms and conditions in factoring any and all of Hospital ABC's eligible A/R under a recourse sale:

NCV 0.70
Advance rate/factor: 0.75
Reserve rate: 0.25
Factoring fee as NCV percent: 0.02
Reserve balance: To be released entirely to ABC
Invoice collection period: ≤ 30 days

• After Hospital ABC contracted Financial Institution DEF as its medical factor and paid all the necessary set-up and transaction fees and due diligence deposit, the hospital's eligible A/R were all set to be factored.

• A week later, Financial Institution DEF reported that it was able to collect the exact NCV of one eligible A/R from CalState Health Insurance Co. with an original invoice face value of $3,000. The NCV was paid by CalState Health Insurance Co. in less than 30 days. Financial Institution DEF thereafter issued and transmitted payment to Hospital ABC for this specific invoice.

Based on the above terms and conditions of factoring, you now need to calculate the following by way of auditing the payment that Hospital ABC just received from Financial Institution DEF for this particular A/R:

Problem 1: What was the NCV dollar equivalent for this invoice (to CalState Health Insurance)?

Problem 2: What was the amount advanced by Financial Institution DEF to Hospital ABC before it collected this invoice?

Problem 3: What was the reserve amount kept/held by Financial Institution DEF until the invoice was paid?

Problem 4: What was the factoring fee ($) applied by Financial Institution DEF for this invoice?

Problem 5: What was the reserve balance (leftover) released by Financial Institution DEF to Hospital ABC after CalState Health Insurance paid its invoice?

Problem 6: Finally, how much did Hospital ABC receive/earn in total from factoring this one A/R from CalState Health Insurance Co.?