Question

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 90. Based on experience, 80 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.) b. If the company sells 1,240 forecasts every month at a price of $1,850 each, what is its average balance sheet amount in accounts receivable? (Use 365 days a year. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) 30 days a. Average collection period b. Average balance

Answer 1

a. Average collection period = (Percentage of accounts taking the discount * Discount period) + (Percentage of accounts not taking the discount * Days’ until full payment)

Average collection period = (0.80 * 15 days) + (0.20 * 90 days)

Average collection period = 30 days

b. Average balance = 1,240 * $1,850 * 30 * 12/365

Average balance = $2,262,575.34