Question

Assume there are two competitor firms, ABC and XYZ. ABC had no credit losses last year, but 2% of XYZ’s accounts receivable proved to be uncollectible and resulted in losses. Should XYZ fire its credit manager and hire ABC’s? Defend your response. (2pts)

Indicate by a (+), (-), or (0) whether each of the following events would probably 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                        __                 __               __

On March 1, Minnerly Motors obtains business loan from a local bank. The loan is a $25,000 interest-only loan with a nominal rate of 11%. 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 calculations to receive full credit. (2pts)

     

Cost of Bank Loans. Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. 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)

A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

                                     

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

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

           

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             $ 50,000

February           100,000

March               120,000

April                 105,000

May                 140,000

June                 160,000

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.

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)

                 

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)

                     

     

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)

                 

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

                 

Answer 1

In this scenario, the firm is using costly credit, which is credit that comes with a cost which is equal to that of the discount which was lost. So what this means is that the firm had an opportunity to save money by paying their debt within 10 days.

At that point they would have been paying the true cost, instead they chose to wait until there note came to term and ended up paying the true cost+2%

S.NO	Particulars	A/R	Sales	Profit
a	The firm tightrens its credit standards	+	-	-
b	Term of trade changed from
	2/10,net 30, to 3/10,net 30.:	+	+	+
c	Term of trade changed from
	2/10,net 30, to 3/10,net 40.:	+	+	+
d	The credit Manager gets tough with past due accounts	+	0	+

Particulars Amount($)

Loan Amount	25000
Nominal Interest rate	11%
Interest for first month($)	233.56
(+25000*11/100*31/365)

S.NO	Particulars	Amount
A	Loan Amount	50000
	Interest Amount(12%)	6000
	Effective interest rate(%)	12
	(6000/50000*100)
B	Loan Amount	50000
	Interest Amount(9%)	4500
	20% Compensating balance
	Revised Loan Amount	40000
	(50000-50000*20/100)
	Effective Interest Rate(%)	11.25
	(4500/40000*100)
C	Loan Amount	50000
	Interest Amount(8.75%)	4375
	15% Compensating balance
	Revised Loan Amount	42500
	(50000-50000*15/100)
	Effective Interest Rate(%)	10.29
	(4375/42500*100)

	Collections done in months
Month Sales	Jan	Feb	Mar	Apr	May	June	Total
Jan	10000	15000	25000				50000
Feb		20000	30000	50000			100000
March			24000	36000	60000		120000
Total	10000	35000	79000				270000
Total Sales	270000
Total Collection(10000+35000+79000)	124000
March end Receivable Balance	146000

June month Sales = 160000

Uncollected till june = 160000*80/100 = $128000 Age Bucket (0-30)

May month sales = $140000

Uncollected till June = 140000*50/100 = $70000 Age bucket (31-60)

June month end receivable balance = $ 128000+70000 = $198000

S.No	Particulars	Quarter 1	Quarter 2
1	Accounts receivable Outstanding	146000	198000
2	Credit Sales	270000	405000
3	DSO days(1/2*90)	48.67	44
	Amount Oustanding	0-30	31-60	Total
	As on June end($)	128000	70000	198000