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

Mehta Traders buys goods on terms '2/10, net 30'. If it forgoes the discount and pays on day 30, the approximate annualised cost of trade credit using a 360-day year and the simple formula [Discount/(100 - Discount)] x [360/(Credit period - Discount period)] is closest to:

Forgoing a 2/10, net 30 discount costs about 36.7% a year. The formula is 2/98 multiplied by 360/20, since the buyer pays 20 extra days later for a 2% saving foregone on 98 rupees effectively borrowed. This is far above typical bank borrowing rates.

  1. A36.7%Correct
  2. B24.5%
  3. C18.0%
  4. D37.2%

Explanation

Cost = (2/98) x (360/20) = 0.020408 x 18 = 36.73%, so about 36.7%. Option B uses 360/30 (full credit period) giving 24.5%. Option C is 2% x 360/40, a wrong period. Option D is the compounded cost, not the simple one.

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