Question

21-9: Accruals and Accounts Payable (Trade Credit) Problem 21-16 Trade Credit The Thompson Corporation projects an increase in sales from $1 million to $3 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 35 days - paying in 65 days and thus becoming 35 days past due - without a penalty because of its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? Round your answers to two decimal places. Assume 365 days in year for your calculations. Do not round intermediate calculations. Nominal cost Effective cost

Answer 1

Answer:

20.52 % Normal Cost 22.40 % Effective cost

Working:

Normal cost = Discount Percentage ÷ (1-Discount %) * [365/(Allowed payment days - Discount days)]

= 3% / (1 - 3%) * 365 / (65 - 10)

= 20.52%

Discount Percentage ÷ (1- Discount %) = 3% / (1 - 3%) = 3% / 97% = 3.0927835%

Allowed payment days - Discount days =65 -10 = 55

Effective cost = (1 + 3.0927835%) ^365/55 -1 = 22.40%