Problem 17-7 Size of Accounts Receivable [LO 2] Essence of Skunk Fragrances, Ltd
ID: 2699219 • Letter: P
Question
Problem 17-7 Size of Accounts Receivable [LO 2]
Essence of Skunk Fragrances, Ltd., sells 6,300 units of its perfume collection each year at a price per unit of $393. All sales are on credit with terms of 2/20, net 60. The discount is taken by 45 percent of the customers.
What is the amount of the company%u2019s accounts receivable? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)
In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 4/20, net 60 to preserve its market share. Will this change in policy increase or decrease accounts receivable?
Essence of Skunk Fragrances, Ltd., sells 6,300 units of its perfume collection each year at a price per unit of $393. All sales are on credit with terms of 2/20, net 60. The discount is taken by 45 percent of the customers.
Explanation / Answer
Solution : figures in $ Credit Terms: 2/20 net 60, defined as the trade credit in which clients can opt to either receive a 2 percent discount for payment to a vendor within 20 days or pay the full amount (net) of their accounts payable in 60 days Total sales (credit only) = 6300 *393 = 2475900 Req. 1 [a] As 45% customer Opt for discount so debtors will be = 2475900 * 45% * 0.98 * 20/360 = 60660 approx Note : 1. assuming 360 days in a year 2. trade discount will be deducted so 2% is deducted so 0.98 is taken in calculation (b) As 55% customer not Opt for discount so debtors will be = 2475900 * 55% * 60/360 = 226957 So total debtors will be = 60660 + 226957 = 287617 Req. 2 credit policy to terms of 4/20, net 60 Assuming 45% of customer still opting discount. [a] As 45% customer Opt for discount so debtors will be = 2475900 * 45% * 0.96 * 20/360 = 59422 approx Note : 1. assuming 360 days in a year 2. trade discount will be deducted so 2% is deducted so 0.98 is taken in calculation (b) As 55% customer not Opt for discount so debtors will be = 2475900 * 55% * 60/360 = 226957 So total debtors will be = 59422 + 226957 = 286379 So account receivable will decrese due to change In policy.