Question

Black Panther Inc. 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 P450,000 per year. On average, how much “free” trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts

Answer 1

Credit terms indicate the percentage discount a firm can take off the invoice amount if payments are made within the discount payment period. The shorter this period, the higher the cost of credit.

Many industries or trades will have typical terms, such as “2/15 net 60.” This means the entire balance is due within 60 days of the invoice, but the buyer can take a 2% cash discount if the bill is paid within 15 days.

 

Per credit cycle purchase = Net purchases x 60/365

                                        = 450,000*60/365

                                        = $73,972.6

Free trade  credit per  cycle = 73,972.6 * 15/60

                                            = $18,493.15 or $18,493

Free trade  credit per  cycle = $18,493