Question

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/20, net 40. Based on experience, 60 percent of all customers will take the discount.

a. What is the average collection period for the company?(Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. If the company sells 1,540 forecasts every month at a price of $1,320 each, what is its average balance sheet amount in accounts receivable? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. Average collection period days

b. Average accounts receivable

Answer 1

Solution:
a.	Average collection period	28	days
b.	Average accounts receivable	1,871,289.86
Working Notes:
	2/20, net 40 means customer will get 2 % discount if he pay within 20 days or pay full payment in 40 days.
a.	Average collection period
	= discount period x % of customer avail + total period x % of customer does not avail.
	60 percent of all customers will take the discount = % of customer avail discount = 60%
	% of customer does not avail = 100% - 60% = 40%
	Average collection period
	= 20 x 60% + 40 x 40%
	= 28 days
b.	Average accounts receivable	$1,871,289.86
	'=(no of forecasts) (price)(average collection period )(12/365)
	'=(1540) (1320)(28 )(12/365)
	'=1871289.863
	=$1,871,289.86