1) Trade credit terms of 2/10, net 90 are availabe. Calculate the cost of trade

Question

1) Trade credit terms of 2/10, net 90 are availabe. Calculate the cost of trade credit when payment is made on the net due date using EAR (also known as APY). Use a 360 day year.

2) The LD Tv Corportion had taxable income of the $815,000 this past year. Its cost of goods sold was $0.8 million and its operating expenses were $300,000. Interest expenses on oustanding debts were $100,000 and the company paid $30,000 in preferred stock dividends. The company recevied interest income of $15,000. Determine LD TV's sales.

Explanation / Answer

Answer:

1) To calculate the cost of trade credit is we need to calculate through the following formulae through the APY method:

Discount%/ (100%- Discount%)* 360/(full all payments days- discount days)

under this 2/10 net 90 means 2% discount, full payment days are 90 and discounts days are 30

= 2%/(100%-2%)*360/(90-10)=9.18%

so the cost of trade credit is 9.18%

b) we can calculate the sales by taking into account the performa of income statement:

Assume net sales as x, so

x+Interest income-cogs= Gross profit= x+ 15000

Gross profit - Operating expsnes=x+15000-300000=PBIT

PBIT- Interest expense= x+15000-300000-100000=PBT

PBT=815000 which is given in question so now equate with whole equation

X+15000-300000-10000=815000

so X= $1280000

so LD tv sales are $1280000.

(ends)

Net sales Plus Interest income Minus Cogs Gross profit Minus operating expense PBIT Minus interest expense PBT Minus tax PAT Minus dividend Profits available to shareholders

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