#14: INCOME TAX PAYMENT: Managers at Benson Automotive sign a $48,000 simple discount note for six months for funds to pay corporate income taxes. If the discount rate is 8.5%, find (a) the discount and (b) the proceeds.
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- Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.McMasters Inc. specializes in BBQ accessories. In order for the company to expand its business, they take out a long-term loan in the amount of $800,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 9%. Each year on December 31, the company pays down the principal balance by $50,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year. A. Determine the outstanding principal balance on December 31 of the first year that is computed for interest. B. Compute the interest accrued on December 31 of the first year. C. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.Gear Up Co. pays 65% of its purchases in the month of purchase, 30% in the month after the purchase, and 5% in the second month following the purchase. What are the cash payments if it made the following purchases in 2018?
- Blake Department Store sells television sets with one-year warranties that cover repair and replacement of television parts. In the month of June, Blake sells forty television sets with a per unit cost of $500. If Blake estimates warranty fulfillment at 10% of sales, what would be the warranty liability reported in June? A. $1,000 B. $2,000 C. $500 D. $20,000Cowboy Construction buys materials on account from Highes. Highes offers a 2 percent discount for invoices paid within 10 days. Full payment is due within 90 days. But Cowboy Construction routinely pays its invoices on the ninetieth day. If Cowboy’s effective tax rate is 42 percent, what is the cost of capital for accounts payable in percentage? Excel calculationTo increase its market share, Sole Brother Inc. decided to borrow $50,000 for more advertising for its shoe retail line. The loan is to be paid in four equal annual payments with 15% interest. The loan is discounted 12 points. The first 6 “points” are an additional interest charge of 6% of the loan, deducted immediately from what is received from the $50,000 loan. Another 6 points or $3000 of additional interest is deducted as four $750 additional annual interest payments. What is the after-tax interest rate on this loan, if the firm’s combined tax rate is 28%?
- You are working as a treasurer for a Toronto-based long-term healthcare company. Your company has $10,000,000 of excess cash and you notice that, on June 29, 2023 the Canadian overnight REPO rate average (CORRA) is 4.75%. If you consider depositing your company's excess cash ($10,000,000) for 14 consecutive days in this overnight rate, calculate the after-tax interest income assuming that the tax rate on interest income is 40%. Also, assume that there is no transaction costLastly, can you show me how to do this one? 22. In 2018, XYZ, Inc. sold 2,000 beds for $50 each. The beds carry a 2-year warranty for repairs. XYZ estimates that repair costs will average 3% of the total selling price. What amount would be recorded in the warranty liability account as a result of selling the beds during 2018? Assets = Liabilities + Stockholders’ Equity Revenues – Expenses = Net IncomeA company is currently offering terms of 1/10 net 45 to its customers. If the average invoice is $200,000, and the company's cost of capital is 8%, would the company be better off if their customers take the discount or not? answer choices: No. The seller is better off by $580 if the buyers pay on Day 45 Yes, because the seller is better off by about $580 if the buyers take the discount. No. The seller is better off by $480 if the buyers pay on Day 45 Yes, because the seller is better off by about $480 if the buyers take the discount.
- Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 55, and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? ExplainMr. Flores made a money market placement of P1, 000.000 for 30 days at 7.5% per year. If the withholding tax is 20%, what is the net interest that Mr. Flores will receive at the end of the month? Ans. Net Interest = P5, 000 A bill for a motorboat specifies the cost as P1, 200 due at the end of 100 days but offers a 4% discount for cash in 30 days. What is the highest rate, simple interest at which the buyer can afford to borrow money in order to take advantage of the discount? Ans. r = 21.4% The monthly demand for ice cans being manufactured by Mr. Sison is 3,200 pieces with a manually operated guillotine, the cost cutting price is 25 pesos per piece. An electrically operated hydraulic guillotine is offered to Mr. Sison with the price of 275,000 pesos and which will cut by 30% less the unit cutting cost of money. How many months will Mr. Sison be able to recover the cost of the machine if he decides to buy now. Ans. 11.5 monthsCommercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (Note: Assume a 365-day year.) 1.What effective annual rate will the firm pay for financing with commercial paper, assuming that it is rolled over every 90 days throughout the year? Format: 1.11% 2.If a brokerage fee of $9,612 was paid from the initial proceeds to an investment banker for selling the issue, what effective annual rate will the firm pay, assuming that the paper is rolled over every 90 days throughout the year? Format: 11.11%