Note: The expected average accounts receivable balance equals the average collection period times the credit sales per day.
So, 25 days needs to calculate. Because, the question says "
Assume that the average collection period is 25 days." which is given.
The confusion is: The credit policy is : 2/10,n/30.
Lets take another scenario, If, they do not give this 25 days, then we will take 30 days for (1/2) balance receivable to calculate (you can try, the answer will be $27,123.29)
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Ganesan Sivalingam
Accountant
Sharqiyah Desalination Co SAOG
Muscat
Oman
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Original Message:
Sent: 06-08-2014 03:48 AM
From: Ozge Yagcioglu
Subject: part2 question
I could not understand that why 25 days is used for the calculatipn despite the explanation in the long paragraph(acc to credit policy) average collection period is 20 days?
| Fact Pattern: A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, that is, a 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers. |
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| Question: 4 | Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the company at any point in time, assuming a 365-day year? |
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| Answer (C) is correct.
The expected average accounts receivable balance equals the average collection period times the credit sales per day. Thus, the average accounts receivable balance is $45,205.48 {[(10,000 units sold on credit × $66 price) ÷ 365 days] × 25 days}. The foregoing calculation assumes that receivables are recorded at their gross amounts. | | | |