accounts receivable management set a solutions
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8/2/2019 Accounts Receivable Management Set a Solutions
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Chapter 20
ACCOUNTS RECEIVABLEMANAGEMENT
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20-1A
If a firm buys on trade credit terms of 2/10, net 50and decides to forgo the trade credit discount andpay on the net day, what is the effective annualized
cost of forgoing the discount?
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where a = amount of the discount
b = the discount period
c = the net period
bca
a
360x
1
18.37%10-50
360
x02.01
02.0!
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20-2A
If a firm buys on trade credit terms of 2/20, net 30and decides to forgo the trade credit discount andpay on the net day, what is the effective annualized
cost of forgoing the discount?
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where a = amount of the discount
b = the discount period
c = the net period
bca
a
360x
1
73.47%20-30
360
x02.01
02.0!
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20-3A
a. 1/10, net 20
b. 2/10, net 30
c. 3/10, net 30
d. 3/10, net 60
e. 3/10, net 90
f. 5/10, net 60
Determine the effective annualized cost of forgoing the trade credit discount on thefollowing terms:
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where a = amount of the discount
b = the discount period
c = the net period
bca
a
360x
1
36.36%10-20
360
x01.01
01.0
)(!
a
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36.73%
10-30
360x
02.01
02.0)( !
b
55.67%10-30
360x
03.01
03.0)( !
c
22.27%10-60
360x03.01
03.0)( !
d
13.92%
10-90
360x
03.01
03.0)( !
e
37.89%10-60
360x
05.01
05.0)( !
f
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20-4A
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Applicant #1
Z = 3.3(0.2) + 1.0(0.2) + 0.6(1.2) + 1.4(0.3) + 1.2(0.5)
Z = 0.66 + 0.2 + 0.72 + 0.42 + 0.6
Z = 2.6 < 2.7 thus, reject Applicant #2
Z = 3.3(0.2) + 1.0(0.8) + 0.6(1.0) + 1.4(0.3) + 1.2(0.8)
Z = 0.66 + 0.8 + 0.6 + 0.42 + 0.96
Z = 3.44 > 2.7 thus, accept Applicant #3
Z = 3.3(0.2) + 1.0(0.7) + 0.6(0.6) + 1.4(0.3) + 1.2(0.4)
Z = 0.66 + 0.7 + 0.36 + 0.42 + 0.48
Z = 2.62 < 2.7 thus, reject
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Applicant #4
Z = 3.3(0.1) + 1.0(0.4) + 0.6(1.2) + 1.4(0.4) + 1.2(0.4)
Z = 0.33 + 0.4 + 0.72 + 0.56 + 0.48
Z = 2.49 < 2.7 thus, reject
Applicant #5Z = 3.3(0.3) + 1.0(0.7) + 0.6(0.5) + 1.4(0.4) + 1.2(0.7)
Z = 0.99 + 0.7 + 0.30 + 0.56 + 0.84
Z = 3.39 > 2.7 thus, accept
Applicant #6
Z = 3.3(0.2) + 1.0(0.5) + 0.6(0.5) + 1.4(0.4) + 1.2(0.4)Z = 0.66 + 0.5 + 0.30 + 0.56 + 0.48
Z = 2.5 < 2.7 thus, reject
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20-6A
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Step 1: Estimate the Change in Profit.
= ($1,000,000 x .20) - ($1,000,000 x .08)
= $200,000 - $80,000
= $120,000
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Step 2: Estimate the cost of additional investmentin accounts receivable and inventory.
Estimate the additional investment in accountsreceivable:
= ($6,000,000 / 360) x 90 - ($5,000,000 / 360) x 60= $1,500,000 - $833,333= $666,667 Additional accounts receivable and inventory times the
required rate of return:= ($666,667 + $50,000) .15= $107,500
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Step 3: Estimate the change in the cost of the cashdiscount
= $0 (no change)
Step 4: Compare incremental revenues withincremental costs.
= Step 1 - (Step 2 + Step 3)
= $120,000 - $107,500
= $12,500
The policy should be adopted.
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20-7A
FoxBase Alpha Corporation is considering a major
change in credit policy. Managers are considering
extending credit to a riskier class of customer and
extending their credit from net 30 days to 45 days .
They do not expect bad debts losses on their current
customers to change. Given the ff. information should
they go ahead with the change in credit policy?
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New Sales Level (all credit) $ 12,500,000
Original Sales Level (all credit) $11,000,000
Contribution Margin 20%
Percent bad debt losses on new sales 9%
New Average Collection Period 45 days
Original Average Collection Period 30 days
Additional Investment in Inventory $ 75,000Pre-Tax required rate of return 15%
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Step 1: Estimate the Change in Profit.
= ($1,500,000 x .20) - ($1,500,000 x .09)
= $300,000 - $135,000
= $165,000
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Step 2:Estimate the cost of additional investment inaccounts receivable and inventory.
Estimate the additional investment in accounts receivable:
= ($12,500,000 / 360) x 45 - ($11,000,000 / 360) x 30= $1,562,500 - $916,667
= $645,833
Additional accounts receivable and inventory times the
required rate of return:= ($645,833 + $75,000) .15
= $108,125
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Step 3: Estimate the change in the cost of thecash discount
= $0 (no change)
Step 4: Compare the incremental revenues withthe incremental costs.
= Step 1 - (Step 2 + Step 3)
= $165,000 - $108,125= $56,875
The policy should be adopted.