Reference no: EM132894171

Payables Pty Ltd sells on terms of 2/10, net 30. Total sales for the year are P800, 000. 30% of the customers pay on the 5th day and take discounts; the other 70% pay, on average, after 30 days. Assume a 360-day year for this problem, and also assume that both sales and accounts receivable are recorded net of discounts, regardless of whether or not customers take discounts.

Problem i. What is the effective cost of trade credit for those customers who did not take a discount?

Problem ii. Assume that for those customers who did not take a discount they had an alternative to borrow short term from their bank and pay 20% interest. Would it have been cost effective to borrow from their bank?

Problem iii. If Payable's sales are constant from year to year and also during each year, how much accounts receivable does the company have? Assume that both annual sales and accounts receivable are based on net sales, regardless of whether or not all customers take discounts.