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# Ch20+Answers+to+assigned+problems+v7 - CHAPTER 20 CREDIT...

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CHAPTER 20 CREDIT AND INVENTORY MANAGEMENT Basic 1. ( LO2) a. There are 30 days until account is overdue. If you take the full period, you must remit: Remittance = 400(\$125) Remittance = \$50,000 b. There is a 1 percent discount offered, with a 10 day discount period. If you take the discount, you will only have to remit: Remittance = (1 – .01)(\$50,000) Remittance = \$49,500 c. The implicit interest is the difference between the two remittance amounts, or: Implicit interest = \$50,000 – 49,500 Implicit interest = \$500 The number of days’ credit offered is: Days’ credit = 30 – 10 Days’ credit = 20 days 2. (LO1) The receivables turnover is: Receivables turnover = 365/Average collection period Receivables turnover = 365/36 Receivables turnover = 10.139 times And the average receivables are: Average receivables = Sales/Receivables period Average receivables = \$47,000,000 / 10.139 Average receivables = \$4,635,616 3. ( LO1) a. The average collection period is the percentage of accounts taking the discount times the discount period, plus the percentage of accounts not taking the discount times the days’ until full payment is required, so: Average collection period = .65(10 days) + .35(30 days) Average collection period = 17 days b. And the average daily balance is: Average balance = 1,300(\$1,700)(17)(12/365) Average balance = \$1,235,178.08

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5. (LO2) The interest rate for the term of the discount is: Interest rate = .01/.99 Interest rate = .0101 or 1.01% And the interest is for: 35 – 10 = 25 days So, using the EAR equation, the effective annual interest rate is: EAR = (1 + Periodic rate) m – 1 EAR = (1.0101) 365/25 – 1 EAR = .1580 or 15.80% a. The periodic interest rate is: Interest rate = .02/.98 Interest rate = .0204 or 2.04% And the EAR is: EAR = (1.0204) 365/25 – 1 EAR = .3431 or 34.31% b. The EAR is: EAR = (1.0101) 365/50 – 1 EAR = .0761 or = 7.61% c. The EAR is: EAR = (1.0101) 365/20 – 1 EAR = .2013 or 20.13% 6. (LO1) The receivables turnover is: Receivables turnover = 365/Average collection period Receivables turnover = 365/39 Receivables turnover = 9.3590 times And the annual credit sales are: Annual credit sales = Receivables turnover × Average daily receivables Annual credit sales = 9.3590(\$47,500) Annual credit sales = \$444,551.28
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