Question

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/25, net 45. Based on experience, 70 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 and round your answer to 2 deceimal places, e.g., 32.16.)
b.	If the company sells 1,590 forecasts every month at a price of $1,370 each, what is its average balance sheet amount in accounts receivable? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a. The average collection period is the percentage of accounts taking the discount times the discount period, plus the percentage of accounts not taking the discount times the days’ until full payment is required, so:

Average collection period = 0.7(25 days) + 0.3(45 days)

Average collection period = 31 days

b. Average balance = 1,590($1,370)(31)(12/365)

Average balance = $2,220,075.62