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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

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Answers (1)
  1. 26 September, 13:44
    0
    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
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