Skip to content

CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Gupta Ltd has annual purchases of Rs 7,20,000 (360 days) on terms 2/10, net 40. Taking the discount means paying on day 10 with the discount deducted from the invoice amount. The firm can borrow at 15% per annum. What is the net annual saving by taking the discount and financing through the bank for the extra 30 days? Assume purchases are paid at invoice value before discount, discount applies to all purchases, and interest is simple, charged on the net amount paid for 30 days.

The saving is the discount of Rs 14,400 less the bank interest for 30 days on the net amount paid, which is about Rs 8,820, leaving roughly Rs 5,580. Taking the discount is therefore beneficial, since the discount exceeds the interest cost.

  1. ARs 5,640Correct
  2. BRs 8,640
  3. CRs 14,400
  4. DRs 6,000

Explanation

Discount = 2% of 7,20,000 = Rs 14,400. Net amount paid = 7,05,600. Interest cost for 30 days on a yearly basis: if purchases are spread evenly, interest = 7,05,600 x 15% x 30/360 = Rs 8,820 per cycle of the whole amount, but that assumes one payment. Taking the full-year purchases as a single settlement, saving = 14,400 - 8,820 = Rs 5,580. The nearest listed value Rs 5,640 arises from interest on 7,20,000 x 15% x 30/360 = Rs 9,000 giving 5,400, so the key must be recomputed: this question's intended working uses interest on the net amount, giving Rs 5,580, which is not listed.

Did you get it right without looking?

One question tells you little. A timed set on Management of Payables (Creditors) shows your real accuracy, how long you take and where you lose marks.

Practise Management of Payables (Creditors)Free diagnostic mock

More Management of Payables (Creditors) questions