Question

In: Finance

Problem 17-11 Terms of Sale [LO 2] A firm offers terms of 1/10, net 30. Requirement...

Problem 17-11 Terms of Sale [LO 2]

A firm offers terms of 1/10, net 30.

Requirement 1:

What effective annual interest rate does the firm earn when a customer does not take the discount? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Effective annual interest rate

%

Requirement 2:

What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Effective annual interest rate

%

Requirement 3:

What effective annual interest rate does the firm earn if the credit period is increased to 40 days? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Effective annual interest rate

%

Requirement 4:

What effective annual interest rate does the firm earn if the discount period is increased to 20 days? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Effective annual interest rate

%

References

eBook & Resources

Solutions

Expert Solution

discount = 1%
discount period = 10 days
days of credit = 30
1) interest rate = 1%/(100%-1%) = 0.01/0.99
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(30 -10)) -1= 0.2013 or 20.13%

2) If discount rate = 2%
Then Interest rate = 2%/(100%-2%) = 2/98
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.02/0.98)^(365/(30 -10)) -1= 0.4459 or 44.59%

3) If credit days increased to 40 then
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(40 -10)) -1= 0.13006 or 13.01%

4)If discount days increased to 20 then
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(30 -20)) -1= 0.4432 or 44.32%

Best of Luck. God Bless
Rate Well and please discuss in case of doubt


Related Solutions

Problem 17-11 Terms of Sale [LO 2] A firm offers terms of 1/10, net 30. Requirement...
Problem 17-11 Terms of Sale [LO 2] A firm offers terms of 1/10, net 30. Requirement 1: What effective annual interest rate does the firm earn when a customer does not take the discount? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)   Effective annual interest rate % Requirement 2: What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Do not round intermediate...
A firm offers credit terms of 3/10, net 35. What is the effective annual rate on...
A firm offers credit terms of 3/10, net 35. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $10,000 purchase? Assume that there are 365 days in one year. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)
A firm offers terms of 1.4/10, net 60.    a. What effective annual interest rate does...
A firm offers terms of 1.4/10, net 60.    a. What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What effective annual interest rate does the firm earn if the terms are changed to 2.4/10, net 60, and the customer does not take the discount? (Use 365...
Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO...
Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO 11-5] [The following information applies to the questions displayed below.]   Nicole has been financing Nicole’s Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 59,000 preferred shares and 49,000 common shares.   Recently the following transactions have taken place.    NGS issues 1,450 preferred shares for $12 a share. NGS repurchases 1,450...
Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO...
Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO 11-5] [The following information applies to the questions displayed below.]   Nicole has been financing Nicole’s Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 59,000 preferred shares and 49,000 common shares.   Recently the following transactions have taken place.    NGS issues 1,450 preferred shares for $12 a share. NGS repurchases 1,450...
Milberg Manufacturing sells on terms of 2/10, net 30. Total sales for the year are   ...
Milberg Manufacturing sells on terms of 2/10, net 30. Total sales for the year are    $3,500,000. Twenty five percent of customers pay on the 10th day and take discounts; the         other 75% pay, on average, 45 days after their purchases. a.         What is the days sales outstanding? b.         What is the average amount of receivables? c.         What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers...
Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30.
Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30. Assuming that you can borrow from the bank at a stated interest rate of 9.5%, which of the following statements is true?a) Your company shouldn’t take the discount under the new terms; you did take the discount under the old terms.b) Your company should take the discount under the new terms; you didn’t take the discount under the old terms.c) Your...
The cost of giving up a cash discount under the terms of sale​ 1/10 net 60​...
The cost of giving up a cash discount under the terms of sale​ 1/10 net 60​ (assume a 365day​ year) is A. 7.4 B. ​ 6.1% C. ​ 7.2% D. ​14.7% On its 2019 balance​ sheet, Sherman Books showed a balance of retained earnings equal to​ $510 million. On its 2020 balance​ sheet, the balance of retained earnings was equal to​ $520 million. Which of the following statements is most​ correct? A. If the company sold​ $10 million of newly...
1) A) Joy company bought $8000 of merchandise on account, terms 2/10 net 30 B) Joy...
1) A) Joy company bought $8000 of merchandise on account, terms 2/10 net 30 B) Joy returned $2000 of the merchandise C) Joy had a cash sale of $10,000; the cost of the merchandise was $4500 D) Joy sold $12,000 on account terms 1/10 net 30; cost of the merchandise was $5500 E) Paid for the purchase in A, less the return. F) Received payment from the sale in D. 2) A) BC company bought $18000 of merchandise on account,...
Cycle Wholesaling sells merchandise on credit terms of 2/10, n/30. A sale for $1,050 (cost of...
Cycle Wholesaling sells merchandise on credit terms of 2/10, n/30. A sale for $1,050 (cost of goods sold of $625) was made to Sarah’s Cycles on February 1. Assume Cycle Wholesaling uses a perpetual inventory system. Required: 1. to 3. Record the entry for sales, cost of goods sold and cash collected on February 9 and March 2. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. Give the journal...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT