Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 30, Problem 19PS
Summary Introduction
To determine: The effect of credit terms based on original and revised terms.
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Yesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice was sent today with the terms, 3/10 net 40. This customer normally pays on the net date. What is the effective rate of interest the customer is paying by not taking the discount? Assume a 365-day year.
White Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.
Assume Simple Company had credit sales of $255,000 and cost of goods sold of $155,000 for the period. Simple uses the percentage of credit sales method and estimates that 2 percent of credit sales would result in uncollectible accounts. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $300.
Required:
What amount of Bad Debt Expense would the company record as an end-of-period adjustment?
Chapter 30 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 2PSCh. 30 - Prob. 3PSCh. 30 - Prob. 4PSCh. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 10PS
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Credit terms Phoenix Lambert currently sells its...Ch. 30 - Prob. 16PSCh. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Prob. 21PSCh. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Money-market yields In Section 30-4 we described a...Ch. 30 - Money-market yields Look again at the previous...Ch. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 33PS
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- Maddox Resources has credit sales of $198.000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay. (Use 365 days in a year.) a-1. What is the average receivables balance? (Do not round Intermediate calculations. Round the final answer to nearest whole dollar.) Accounts receivable balance Receivables turnover a-2. What is the receivables turnover? (Round the final answer to 2 decimal places.) New receivable balance $ 16274 b. If Maddox offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $198.000 for your calculation of receivables. (Do not round Intermediate calculations. Round the floal answer to nearest whole dollar.) Net Change X $ 2658 Yes No 3 c-1. If Maddox reduces its bank loans, which cost 12 percent, by the cash generated…arrow_forwardOn february 5, 2018, nicanor merchandising has purchased goods on account amounting to 500,000 with credit terms of 3/15, n/60 from its major trade supplier. nicanor operates 360 days a year. Required: 3. assuming nicanor did not pay the account within the discount period, how much is the penalty in using the money for the next 45 days? (please answer) 4. in case the prevailing interest rate on bank loan is 20% per annum at simple interest, should nicanor pay within the discount period or not? Breifly discuss your answer and present supporting computation. (please answer) 5. determine the net monetary benefit that nicanor will enjoy in selecting the optimal alternative. (please anwer)arrow_forward1.) Beltline Co. had credit sales of $100,000 for the year, and based on experience estimates that approximately 1% of these sales will be uncollectible. Under the percent of sales method, a.the adjusting entry to record the uncollectible sales would involve a debit to Allowance for Doubtful Accounts and a credit to Bad Debt Expense. b.the estimated uncollectible sales should not be recorded until there is firm evidence that a customer will not pay. c.the estimated bad debt expense is $1,000. d.the estimated bad debt expense is $10,000. 2.) Under the percentage of receivables method theory, a.the majority of accounts receivable portion will not be collected. b.some portion of the existing accounts receivable will not be collected. c.the percentage of uncollectible accounts is calculated as Average Uncollectible Accounts divided by Average Accounts Receivable. d."some portion of the existing accounts receivable will not be collected" and "the percentage of uncollectible…arrow_forward
- Assume Simple Co. had credit sales of $250,000 and cost of goods sold of $150,000 for the period. Simple uses the percentage of credit sales method and estimates that 1 percent of credit sales would result in uncollectible accounts. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $250. What amount of Bad Debt Expense would the company record as an end-of-period adjustment? Bad Debt Expense Rectangular Sniparrow_forwardAssume Simple Co. had credit sales of $250,000 and cost of goods sold of $150,000 for the period.Simple uses the percentage of credit sales method and estimates that 1 percent of credit saleswould result in uncollectible accounts. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $250. What amount of Bad Debt Expensewould the company record as an end-of-period adjustment?arrow_forwardAssume Simple Company had credit sales of $258,000 and cost of goods sold of $158,000 for the period. Simple uses the percentage of credit sales method and estimates that 1 percent of credit sales would result in uncollectible accounts. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $330. Required: What amount of Bad Debt Expense would the company record as an end-of-period adjustment? Bad Debt Expensearrow_forward
- Mr. Rich Mann, is the credit manager of MCC Inc. Mr. Mann would like to estimate the cost of credit sales. From experience, credit customers have paid their bills in an average of 40 days and a standard deviation of 12 days. Customers who pay their bills in 10 days receive a 2% discount. Accounts that are not paid within 75 days are written off as bad debts. (Assume a normal distribution) a. What percentage of accounts is within 25 and 60 days old? b. What percentage of the accounts is written off as bad debts or receives the discount For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). BIUS E E A v 、工%ロ启 Q Paragraph Arial 10pt ...arrow_forwardd) Inter accounts national Industries sells on terms of 3/10, net 50. Gross sales last year were 5,662,500 and receivable averaged 547,500. Half of International’s customers paid on the 15th day and took discounts. What are the nominal and effective costs of trade credit to International’s non-discount customers? (Hint: Calculate sales/day based on a 360-day year, then calculate average receivables of discount customers and then find the DSO for the non-discount customers.arrow_forwardQuestion no. 1: McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 days after their purchases. What is the days sales outstanding? What is the average amount of receivables? What would happen to average receivables if McDowell toughened its collection policy with the result that all non-discount customers paid on the 40th day? Question no.2: International Industries sells on terms of 3/10, net 50. Gross sales last year were 5,662,500 and accounts receivable averaged 547,500. Half of International’s customers paid on the 15th day and took discounts. What are the nominal and effective costs of trade credit to International’s non-discount customers? (Hint: Calculate sales/day based on a 360-day year, then calculate average receivables of discount customers and then find the DSO for the non-discount customers. Question no.3: The D.J. Masson…arrow_forward
- A store offers its salespeople a table with coefficients to be applied to the cash sale value of its products if the customer needs to finance the purchase of the products. Assuming the store charges a compound interest rate of 6% p.m. in sales made on credit, calculate the value of these coefficients in the following situations:a) 12 monthly installments, the first being paid after thirty days; (0.119277)b) 24 monthly installments, the first of which is paid upon purchase; (0.075169) c) 36 monthly installments, the first being paid after six months. (0.091528)arrow_forwardMartin Incorporated uses the percent-of-credit sales method to estimate uncollectibles. Total sales for the current year amount to $6,000,000 (2,800,000 were cash sales), and management estimates 5% of credit sales will be uncollectible. Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $3,400. What is the balance in Allowance for Uncollectible Accounts after the adjustment for uncollectible account expense? O $235,700. O $152,000. $163,400 O $147,700. None of the above.arrow_forwardSuperior Company has provided you with the following information before any year-end adjustments: Net credit sales are $125,000. Historical percentage of credit losses is 3%. Allowance for doubtful accounts has a credit balance of $400. Accounts receivables ending balance is $57,000. What is the estimated bad debt expense using the percentage of credit sales method? Multiple Choice $4,150. $3,750. $3,350. $1,710. ext > < Prev 19 of 67 MacBook Air ...arrow_forward
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