Question

Queen Corporation sells on terms of 2/10, 1/30. 70% of customers normally avail of the discounts. Annual sales are P 900,000, 80% of which is made on credit. Cost is approximately 75% of sales.

REQUIRED

a) Average balance of accounts receivable

b) Average investment in accounts receivable.

Answer 1

Sol: Given that ,

Queen corporation sells =2/10,1/30

70% customer avails discounts.

Annual sale= 900000

Credit sales =80%

Cost = 75% of sales.

Average balance of accounts receivables,

Average receivalbles can be computed as sales /receivables turnover.

And receivables turnover = 365/12 months divided by average collection period.

Average collection period ,

Average collection period = (70%*10)*(30%*30) = 16 days., meaning that 70% will avail discount option and remaining 30% wont.

So, average collection period =16 days. Receivables turnover =365/16 = 22.8125.

Average receivables = Sales /turnover,

=900000/22.8125

Average accounts receivables = 39452.05.

Solution b)Let us assume X as average accounts receivable investment

X= 1 year /12 months /Average collection period* Credit sales (where credit sale is 80%)

To compute Average collection period,

Average collection period = (70%*10)*(30%*30) = 16 days.

16 days = (365 * Average accounts receivable investment) / ($900,000 * 80%)

X = (720,000 * 16 ) / 365

X = 31,561.64

Therefore, average accounts receivable investment = 31561.64