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

Question

Business

Jakob Gill

26 September, 12:56

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

+2

Answers (1)

Know the Answer?

Mohammed · Answer 1

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