Chapter 27
Providing and Obtaining Credit
ANSWERS TO END-OF-CHAPTER QUESTIONS
27-1 a. Cash discounts are often used to encourage early payment and to attract customers by
b. Seasonal dating sets the invoice date, or date at which the credit and discount periods
c. An aging schedule breaks down accounts receivable according to how long they have
d. The uncollected balances schedule shows each month’s remaining uncollected
e. The situation when interest is not compounded, that is, interest is not earned on
27-4 No. Although B sustains slightly more losses due to uncollectible accounts, its credit
27-5 AR Sales Profit
a. The firm tightens its credit
standards. – – 0
Explanations:
a. When a firm “tightens” its credit standards, it sells on credit more selectively. It will
b. The larger cash discount will probably induce more sales, but they will likely be from
c. A less stringent credit policy in terms of the credit period should stimulate sales. The
d. If the credit manager gets tough with past due accounts, sales will decline, as will
accounts receivable.
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
27-1 $25,000 interest-only loan, 11% nominal rate. Interest calculated as simple interest based
on 365-day year. Interest for 1st month = ?
With a financial calculator, enter N = 12, PV = 15000, PMT = -1387.50,
FV = 0, and then press I to obtain 1.6432%. However, this is a monthly rate.
27-3 a. Effective rate = 12%.
b. 0 1
| |
50,000 -50,000
2.01
000,50$
c. 0 1
| |
38,125
i = ?
i = ?
Note that, if Hawley actually needs $50,000 of funds, he will have to borrow
15.00875.01
000,50$
= $65,573.77. The effective interest rate will still be 11.48%.
12
1t 12
d
t
d)r1(
000,4$
)r1(
67.166,4$
rd, the monthly interest rate, is 1.1326%, found with a financial calculator. Input N =
Alternative b has the lowest effective interest rate.
27-4 a. The quarterly interest rate is equal to 11.25%/4 = 2.8125%.
b. 0 1
| |
1,500,000 -1,500,000
Note that, if Gifts Galore actually needs $1,500,000 of funds, it will have to borrow
c. Installment loan:
PMT = ($1,500,000 + $33,750)/3 = $511,250.
i = ?
27-5 Analysis of change:
Projected Income Projected Income
Statement Effect of Statement
Under Current Credit Policy Under New
Credit Policy Change Credit Policy
Gross sales $1,600,000 +$ 25,000 $1,625,000
Less: Discounts 0 0 0
Net sales $1,600,000 +$ 25,000 $1,625,000
*Cost of carrying receivables:
funds
ofCost
ratiocost
Variable
dayper
Sales
DSO
.
Current policy = (30)
365
000,600,1$
(0.75)(0.16) = $15,781.
New policy = (45)
365
000,625,1$
(0.75)(0.16) = $24,041.
Since the change in profitability is negative, the firm should not relax its collection
efforts.
27-6 Analysis of change:
Projected Income Projected Income
Statement Effect of Statement
Under Current Credit Policy Under New
Credit Policy Change Credit Policy
Gross sales $2,500,000 -$125,000 $2,375,000
Less: Discounts 0 0 0
Net sales $2,500,000 -$125,000 $2,375,000
Variable costs 2,125,000 – 106,250 2,018,750
*Cost of carrying receivables:
funds
ofCost
ratiocost
Variable
dayper
Sales
DSO
.
365
000,375,2$
The firm should change its credit terms since the change in profitability is positive.
27-7 a. Simple interest: 12%.
NOM% = 11.5; P/YR = 4; EFF% = ? EFF% = 12.0055%.
c. Add-on: Interest = Funds needed(rd).
Loan = Funds needed(1 + rd).
PMT = Loan/12.
$100 =
12
1t t
d
)r1(
8333.8$
.
Enter N = 12, PV = 100, PMT = -8.8333, FV = 0, and press I to get
I = 0.908032% = rd. This is a monthly periodic rate, so the effective annual rate =
(1.00908032)12 – 1 = 0.1146 = 11.46%.
d. Trade credit: 1/99 = 1.01% on discount if pay in 15 days, otherwise pay 45 days later.
b. 1st Quarter: ADS = ($50,000 + $100,000 + $120,000)/90 = $3,000.
c. Age of Accounts Dollar Value Percent of Total
0 – 30 days $128,000 65%
d. Month Sales Receivables Receivables/Sales
April $105,000 $ 0 0%