Question

The Dithers Company's major supplier had been extending credit on terms 2/10 net 30. Dithers takes all discounts as a matter of policy. If its supplier switches to terms of net 30, how might Dithers' Balance Sheet change ?

a. Accounts Receivable would decrease and bank loans increase.

b. Accounts Receivable would increase.

c. Accounts Payable would decrease.

d. Accounts Payable would increase and bank loans decrease.

e. There would be no changes.

Discuss full the reasons for your choice.

Answer 1

Correct answer is option : d. Accounts Payable would increase and bank loans decrease.

Company is getting discount of 2% if they pay by 10 days of purchase. But now supplier has removed the discount and credit term is 30 days.

Previously Company was availing discount which means they were paying with in 10 days.

But now since there is no discount therefore Dithers will not pay to creditor early and will make payment by maturity date (30 days of purchase). So Account payable balance will increase. Also since money payment will be delayed company may not need loan to pay off the creditor or instead they can pay loan as they will not pay in 10 days to creditor. Whatever the case may be bank loan will decline.