Question

Gonzales Company currently uses maximum trade credit by not taking discounts on its The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-dayyear. The interest rate on the notes payable is 10%, and the tax rate is 40%.

If the firm implements the plan, what is the expected change in net income?

a. $32,964

b.$34,699

c. $36,526

d.$38,448

e. $40,370

Answer 1

Answer:

d.$38,448

Explanation:

The computation of the expected change in net income is shown below:

The net purchase for one day = $11,760

For 20 days excluding discount period i.e 10 days , it would be

= $11,760 × 20 days

= $235,200

The interest would be

= $235,200 × 10%

= $23,520

Now the gross purchase  is

= (Net purchase × total number of days in a year) ÷ (1 - discount rate)

= ($11,760 × 365 days) ÷ (1 - 0.02)

= $4,292,400 ÷ 0.98

= $4,380,000

The discount is

= $4,380,000 × 0.02

= $87,600

After tax rate, the change in net income would be

= ($87,600 - $23,520) × (1 - tax rate)

= $64,080 × 0.60

= $38,448

Answer 2

If the firm implements the plan, the expected change in net income is: d.$38,448.

Expected change in net income

First step

Net purchase= $11,760 × 20 days

Net purchase= $235,200

Interest = $235,200 × 10%

Interest= $23,520

Second step

Gross purchase= (Net purchase × Number of days in a year)/ (1 - Discount rate)

Gross purchase= ($11,760 × 365 days) ÷ (1 - 0.02)

Gross purchase= $4,292,400 ÷ 0.98

Gross purchase= $4,380,000

Third step

Expected change in net income=[ ($4,380,000 × 0.02)-  $23,520] × (1 - .40)

Expected change in net income= ($87,600 - $23,520) × (1 - .40)

Expected change in net income= $64,080 × 0.60

Expected change in net income= $38,448

Therefore If the firm implements the plan, the expected change in net income is: d.$38,448.

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