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Question
Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $525,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the suppliers credit terms? (Assume a 365-day year.) Do not round intermediate calculations.
a. $36,297
b. $31,011
c. $42,992
d. $31,363
e. $35,240
ANSWER: e
RATIONALE: Discount 2% Gross purchases $525,000
Discount days 15 Days in year 365
Net days 40
u200b
Net purchases = Gross (1 - Disc %) = $514,500
Net purchase per day = Net / 365 = $1,410
Total trade credit = Net days 
Net per day = $56,384
Free credit = Net per day Discount days = $21,144
Costly credit = Total credit - Free credit = $35,240
u200b
LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure
115. Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $475,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
a. $78,082
b. $96,822
c. $60,904
d. $78,863
e. $91,356
ANSWER: a
RATIONALE: Purchases $475,000 Net days 60
Discount % 2% Days to payment 60
Discount days 15 Days/Year 365
u200b
Purchases/day = $475,000 / 365 = $1,301
Average trade credit = Average A/P = Days to payment Net purchases/day = $78,082
u200b
LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure
Answer
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