Question

PLEASE ANSWER BOTH PARTS!!!

Miyagi Data, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 3/10, net 50. Based on experience, 75 percent of all customers will take the discount.

a. What is the average collection period? (Do not round intermediate calculations and round your answer to the nearest whole number)

b. If the company sells 1,280 forecasts every month at a price of $2,380 each, what is its average balance sheet amount in accounts receivable?

Answer 1

3 / 10 net 50 means, 3% discount is given if amount is paid within 10 days, otherwise the whole amount is payable within 50 days.

a) Average collection period

75% customers take the discount and pay within 10 days and 25% don't take the discount and pay within 50 days. So, for 75% customers receivable period is 10 days whereas for 25% customers receivable period is 50 days.

Average collection period = 0.75 x 10 days + 0.25 x 50 days = 20 days

b) Assuming 365 days in a year, we have -

Average balance sheet amount = Total sales in a year x Average collection period / 365 days

or, Average balance sheet amount = [Total sales forecast in a year x price per forecast ] x 20 days / 365 days

or, Average balance sheet amount = [ 1280 x $2380 x 12 ] x 20 / 365 = $2,003,112.32876 or $2,003,112.33