Question

QUESTION FOUR [25]

4.1 Eer Distributors normal credit terms to Ster Stores are 30 days but is prepared to allow a 2% rebate if it pays the account within 15 days.

Calculate the cost to Ster Stores of not accepting the discount. (5)

4.2 Differentiate in detail between accruals and when the bank account has an unfavourable balance. (8)

4.3 Discuss the different types of non-current liabilities. (12)

Answer 1

4.1 Since the Eer Distributors allows 2% rebate if the account is paid within 15 days, the cost for Ster Stores is

Discount %/(100-Discount %) x (360/Allowed payment days – Discount days)

2%/(100%-2%) x 360/(30-15)

48.97%

4.2 Difference between Accruals and Unfavorable Balance in Bank Statement.

The accruals stand for an expense that has been incurred but is still to be recognized for the services used/rendered for the given time frame. Hence, the same can be posted on the cash or bank statement as accrued however, the payment for the same can be made at a future time. E.g. Insurance Premiums for a particular year which has not yet ended. Hence, the same is accrued.

The unfavorable balance on the other hand shows the impact of a particular transaction that makes the total balance negative or the accruals that have been realized and exceed the existing positive balance or favorable balance in the bank account.

4.3 Here are some of the examples for non current liabilities:

Long Term Debt/Loan - Any long term liability or debt ranging for a repayment period of more than 5 years accounts for Long Term Debt/Loan and serves as non current liabilities in the balance sheet. This includes property loan from bank, long term corporate financing, collateral debts, etc.

Lease Obligations - Long term lease obligations form a part of non current liabilities. In capital lease, company buys the lease by giving specific regular amount or rent. At the end of the lease, company gets the right on the property which it has taken on lease.

Long Term Bonds - The bonds with a maturity of more than 5 years fall in the category of long term bonds. Usually, they come with a fixed maturity and coupon rate that a company is obliged to pay to the investors.

Employee Provident Funds - Provident Funds, Employee Shares commonly referred to as ESOPs fall in this category of non current liabilities.