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

Verma Ltd buys on terms 3/10, net 60 and purchases Rs 4,90,000 worth (gross invoice value) of goods per lot. It can pay on day 10 taking the discount, or on day 60. Using a 360-day year and the simple formula, what is the net amount payable on day 10, and the annual cost of forgoing the discount (nearest)?

The net payable on day 10 is Rs 4,75,300 after the 3% discount, and the annual cost of forgoing the discount is about 22.27%. This comes from 3/97 multiplied by 360/50, since the extra credit period is 50 days.

  1. ARs 4,75,300 and 21.65%
  2. BRs 4,75,300 and 22.27%Correct
  3. CRs 4,90,000 and 22.27%
  4. DRs 4,75,300 and 3.09%

Explanation

Net payable = 4,90,000 x 0.97 = 4,75,300. Cost = [3/97] x [360/50] = 3.0928% x 7.2 = 22.27%. Using 3/100 instead of 3/97 gives 21.60%, not an option, and the 3.09% option omits annualisation. Option with 21.65% is wrong because it uses an incorrect base.

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