Question

1. Assume there are two competitor firms, ABC and XYZ. ABC had no credit losses last year, but 1% of XYZ’s accounts receivable proved to be uncollectible and resulted in losses. Can you determine which firm’s credit manager is performing better? Why or why not? (2pts)

2. Indicate by a (+), (-), or (0) whether each of the following events would most likely cause A/R, sales, and profits to increase, decrease, or be affected in an indeterminate manner. Also provide an explanation for each event and the affects. (7pts)

AR              Sales Profit

a. The firm tightens its credit

standards.                                                                                                             

b. The terms of trade are

changed from 2/10, net 30,

to 3/10, net 30.                                              

c. The terms are changed from

2/10 net 30, to 3/10, net 40.                                             

d. The credit manager gets tough

with past-due accounts.      

Explanations:

3. On March 1, Minnerly Motors obtains business loan from a local bank. The loan is a $50,000 interest-only loan with a nominal rate of 9%. Interest is calculated on a simple interest basis with a 365-day year. What is Minnerly’s interest charge for the first month (assuming 31 days in the month)? You must show all calculations to receive credit. (2pts)

4. Cost of Bank Loans. Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of $40,000. First City has offered Hawley the alternatives listed below. Calculate the effective annual interest rate for each alternative. You must show calculations to receive full credit. (6pts)

5. • A 11% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

5. • A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.

      

5. • An 8.75% annual rate on a discounted loan, with a 15% compensating balance.

5. Monitoring of Receivables. The Russ Fogler company, a small manufacturer of cordless telephones, began operations on January 1. Its credit sales for the first 6 months of operations were as follows:

Month Credit Sales

January $120,000

February 100,000

March 50,000

April 160,000

May 140,000

June 105,000

Throughout this entire period, the firm’s credit customers maintained a constant payments pattern; 20% paid in the month of sale, 30% paid in the first month following the sale, and 50% paid in the second month following the sale.

1. What was Fogler’s receivables balance at the end of March and at the end of June? You must show calculations to receive full credit. (2pts)

2. Assume 90 days per calendar quarter. What were the ADS and DSO for the first and second quarter? You must show calculations to receive full credit. (3pts)

3. Construct an aging schedule as of June 30. Use account ages of 0-30, 31-60, and 61-90 days. You must show calculations to receive full credit. (3pts)

4. Construct the uncollected balances schedule for the second quarter as of June 30. You must show calculations to receive full credit. (3pts)

Answer 1

Ans 1

No, the company should not tae decision just on the basis of above information. There might be raeson that the defaulting company have suffered losses due to which they defaulted in payment of XYZ company. Also the company must have to loo up there policies and procedure which needs to be modified so that the same will not occur in future. ABC company is competitor of XYZ company and hiring the competitor's employee will be risky at some times as there is chances of leaking of confidential information. So, XYZ/s credit manager should not be fired.

Ans 2

Particulars	AR	Sales	Profit
1. The firm tightens its credit standards	-	-	-
2. The terms of trade are changed from 2/10, net 30, to 3/10, net 30	+	+	-
3. The terms are changed from 2/10 net 30, to 3/10, net 40.	+	+	+
4. The credit manager gets tough with past-due accounts.	-	0	0

Explanation for 1 - If firm tightens its credit standards then it will have negative impact on sales as less people would be willing to buy the product from it. As a result of decline in sales, profit will also decline. Accounts receivable also have negative impact due to tight policy.

Explanation for 2 - If trade terms are changed from 2/10 net 30 to 3/10 net 30 that means extra discount will be given if payment is made early by customer. Sales increases due to extra discount and profit also increases. Accounts receivables decreases due to payment received early from customer.

Explanation for 3 - If trade terms are changed from 2/10 net 30 to 3/10 net 40 that means extra discount will be given if payment is made early and also extra time given to customer for making full payment. Sales increases due to extra discount and profit also increases. Accounts receivables increses as customers using trade credit period.

Explanation for 4 - There will be no change in sales and profit due to credit manager gets tough with past due accounts. Accounts receivable decreases due to tight policy.

Ans 3

Interest = Loan amount * Interest rate * No. of days/365

= $50,000 * 9% * 31/365

= $382.91

Ans 4

a) Effective annual interest rate = 11%

b) Effective annual interest rate

Annual interest on loan = $40,000 * 9%

= $3,600

Actual amount received = $40,000*20%

= $8,000

Effective annual interest rate = [$3,600 / $($40,000 - $8,000)] * 100

= 11.25%

c) Loan amount after deduction of (8.75% + 15%) = $40,000

Full amount is $40,000 / 76.25% = $52,459

Discount interest @ 8.75% of $52,459 = $4,590

Compensating balance @ 15% of $52,459 = $7,869

End of first year = $52,459 – $7,869 = $44,590

With a financial calculator, (setting 1_p/yr) enter N = 1, PV = $40000, PMT = 0, and FV = $44,590 to solve for I/YR =11.48%.

(Interest paid/Amount received = $4,590 / $40,000 = 11.48%)

Ans 5

a)

b) Average Daily Sales for Ist Quarter = Total Sales for Ist Quarter / No. of days in Quarter

= ($120,000 + $100,000 + $50,000) / 90

= $3,000

Average Daily Sales for IInd Quarter = Total Sales for IInd Quarter / No. of days in Quarter

= ($160,000 + $140,000 + $105,000) / 90

= $4,500

Daily Sales Outstanding for Ist Quarter = Accounts Receivable for Ist Quarter / Average Sales per Day

= $90,000 / $3,000

= 30

Daily Sales Outstanding for IInd Quarter = Accounts Receivable for IInd Quarter / Average Sales per Day

= $154,000 / $4,500

= 34.22

c) Ageing Schedule as on June 30

Month	Balance at end of June	0-30	31-60	61-90	Total Outstanding
Jan	-	-	-	-	-
Feb	-	-	-	-	-
Mar	-	-	-	-	-
Apr	-	-	-	-	-
May	$70,000	-	$70,000	-	$70,000
Jun	$84,000	$84,000	-	-	$84,000
Total	$154,000	$84,000	$70,000	-	$154,000

d) Uncollected Balance Schedule as on June 30

Month	Uncollected Balance as on June 30	June	July	August	Total
Jan	-	-	-	-	-
Feb	-	-	-	-	-
Mar	-	-	-	-	-
Apr	-	-	-	-	-
May	$70,000	-	$70,000	-	$70,000
Jun	$84,000	-	$31,500	$52,500	$84,000
Total	$154,000	-	$101,500	$52,500	$154,000