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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Computation of Trade Receivables
Annual turnover (given) : $4000000
Current level of debtors (given) : $550000
Velm Plc is considering offering a discount of 1% to customers paying within 14 days. the company also expects that offering a discount for early payment will reduce the average credit period taken by its customers to 26 days. twp-third of customers are expected to take advantage of the discount.
Question:
Which is the correct way to find the proposed level of debtors?
alternative 1 :
Cost of 1 % discount = $4m x 1% x 2/3 = $26,667
Proposed level of debtors = ($4m – $26,667) x (26/365) = $283031
alternative 2 :
Average collection period = (2/3 x 14) + (1/3 x 26) = 18 days
Proposed level of debtors = ($4m x 18) / 365 = $197260
alternative 1.
In your second alternative you say that the average period is 18 days, but the question specifically says that the average period is 26 days!!! (The question has effectively done the workings for you).