Professional Documents
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Straight Problems
1. Yellow Company’s budgeted sales for the coming year are P96 million, of which 80%
are expected to be credited sales at terms of n/30. The company estimates that a
proposed relaxation of credit standards would increase credit sales by 30 days to
45 days. Based on a 360-day year, the proposed relaxation of credit standards would
result to an accounts receivable balance of
2. Press Corporation plans to tighten its credit policy. Below is the summary of
changes
OLD NEW
Average number of days collection 75 50
Ratio of credit to total sales 70% 60%
Projected sales for the coming year is P100 million and it was estimated that the
new policy will be a 5% less if the new policy is implemented. Assuming a 360-day
year, what is the effect of the new policy on accounts receivable?
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EFFECTIVE DISCOUNT RATE
4. Mart has sales of P3 million. Its credit period and average collection period are
both 30 days and 1% of its sales end up as bad debts. The general manager intends
to extend the credit period to 45 days which will increase sales by P 300, 000.
However, bad debts losses on the incremental sales would be 3%. Cost of products
and related expenses amount to 40% exclusive of the cost of carrying receivables
of 15% and bad debt expenses.
Assuming 360 days a year, the change in policy would result to incremental
investment in receivables of:
The change in the credit policy would result to increase (decrease) in
incremental profit of:
5. J. Francisco Technologies is considering changing its credit terms from 2/15, net/30
to 3/10, net/30 in order to speed collections. At present, 40% of Francisco’s
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customers take the 2% discount. Under the new terms, discount customers are expected
to rise to 50%. Regardless of the terms, half of the customers who do not take the
discount are expected to pay on time, whereas the remainder will pay 10 days late.
The change does not involve a relaxation of credit standards; therefore, bad debt
losses are not expected to rise above their present 2% level. However, the more
generous cash discount terms are expected to increase sales from P2,000,000 to
P2,600,000 per year. Francisco’s variable cost ratio is 75%, the interest rate on
funds invested in accounts receivable is 9%, and the firm’s corporate tax rate is
40%.
Requirements:
1. What is the days sales outstanding before and after the change?
2. Calculate the discount costs before and after change
3. Calculate the peso cost of carrying receivables before and after the change.
4. Calculate the bad debt losses before and after the change
5. What is the incremental profit from the change in credit terms? Should
Francisco change its credit terms?
2. Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30 will
generally
A. Increase the average collection period and increase sales.
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B. Increase the average collection period and reduce sales
C. Reduce the average collection period and increase sales.
D. Reduce the average collection period and reduce sales.
6. LAON Company with P 4.8 million in credit sales per year plans to relax credit
standards, projecting that this will increase credit by P 720, 000. The company’s
average collection period for new customers is expected to be 75 days, and the
payment behavior of the existing customers is not expected to change. Variable
costs are 80% of sales. The firm’s opportunity cost is 20% before taxes. Assuming
a 360-day year, what is the company’s benefit (loss) on the planned change in
credit terms?
A. P0 C. P114,000
B. P28,800 D. P120,000
7. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000.
Forty percent of the customers pay on the tenth day and take discounts; the
other 60 percent pay, on average, 45 days after their purchases.
What is the average amount of receivables?
A. P70,000 C. P77,200
B. P77,500 D. P67,500
8. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80%
are expected to be credit sales at terms of n/30. Palm estimates that a
proposed relaxation of credit standards will increase credit sales by 20% and
increase the average collection period from 30 days to 40 days. Based on a
360-day year, the proposed relaxation of credit to standards will result in an
expected increase in the average accounts receivable balance of
A. P540,000 C. P2,700,000
B. P900,000 D. P1,620,000
A. P281,250 C. P20,250
B. P168,750 D. P56,250
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10. Mercury distributor sells to retail stores on credit terms of 2/10, net/30.
Daily sales average 150 units at a price of P300 each. Assuming that all sales
are on credit and 60% of customers take the discount and pay on day 10 while
the rest of the customers pay on day 30, the amount of Mercury’s accounts
receivable is
A. P1,350,000 C. P900,000
B. P990,000 D. P810,000
11.The average collection period for a firm measures the number of days
A. After a typical credit sales is made until the firms receives the
payment.
B. For typical check to “clear” through the banking system
C. Beyond the end of the credit period before a typical customer payment is
received.
D. Before a typical accounts becomes delinquent
12. Currently, La Carlota Company has annual sales of P2,500,000. Its average
collection period is 45 days, and bad debts are 3 percent of sales. The credit
and collection manager is considering instituting a stricter collection policy,
whereby bad debts would be reduced to 1.5 percent of total sales, and the
average collection period would fall to 30 days. However, sales would also
fall by an estimated P300,000 annually. Variable costs are 75 percent of sales
and the cost of carrying receivables is 10 percent. Assume a tax rate of 40
percent and 360 days per year.
What would be the decrease in investment in receivables if the change were
made?
A. P9,688 C. P96,875
B. P12,988 D. P129,975
13. What are the days sales outstanding (DSO) before and after the change of
credit policy?
A. 27.0 days and 22.5 days C. 22.5 days and 21.5 days,
respectively respectively
B. 22.5 days and 27.0 days, D. 21.5 days and 22.5 days,
respectively respectively
15. The incremental after tax profit from the change in credit terms is
A. P68,493 C. P60,615
B. P64,640 D. P57,615
17.The high cost of short-term financing has recently caused a company to reevaluate
the terms of credit it extends to its customers. The current policy is 1/10, net
60. If customers can borrow at prime rate, at what prime rate must the company
change its terms of credit in order to avoid an undesirable extension in its
collection of receivables?
A. 2% C. 7%
B. 5% D. 8%
18.When a company offers credit terms of 2/10, net 30, the annual interest cost,
based on a 360-day year, is
A. 24% C. 35.3%
B. 24.5% D. 36.7%
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