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Dear Sir, I am confusing about new policy about offering discount for earlier payment, in chapter 5 example 1 , I had learnt how they work, but in another question I found out another way to do it, let me show this another way:
current receivable: 12,000,000 x 3/12=3,000,000
offering 4% discount early payment: 12,000,000 x4%=480,000
new receivable:(12,000,000-480,000) x 1/12=960,000
fall in receivable: 3,000,000-960,000=2,040,000
would you please tell me what reason for doing this in different way? this way which I found out is practice question 4 Ruby plc.
many thanksIf you watch the free lectures, I go through that way in a later example and explain when to use which way.
(I hope that you are not using the lecture notes on their own – they go with the lectures and it is in the lectures that I explain and expand on the notes.)Yes – the lecture works through several examples (those in the free lecture notes).
Dear Moffat, I have just watch your lecture, the example which you mentioned are not the case the same as practice question 4 Ruby plc, in this question the new policy receivable level calculated by this way: (4,000,000-26,667)x(26/365) instead of 4,000,000×14/365 which I had learnt in chapter 5 lecture. would you please tell me the basic theory about this different method?
many thanksIt is not a different method at all !
You have used 14/365 because the currently sell on 40 days credit and 40 – 26 = 14 days.
However, just because they sell on 40 days credit does not mean that they all pay within 40 days. You know what the current receivables are from the Statement of financial position and so you look at the difference between the current receivables and the new receivables (as I do in the lecture).
The examiner always put little tricks in questions (different ones each time), deliberately to make sure that you understand the topic and are not simply learning rules.
The subtracting of 26,667 is the discount, but as I actually say in the lecture, there are arguments both for subtracting and for not subtracting the discount and the examiner allows it either way (even though the answer is slightly different).
Incidentally, I do hope you have a Revision Kit from one of the approved publishers. Juts practicing the few questions at the back of the lecture notes is nothing like enough practice.
thank you for your help patiently, but what i am still confused is that payment within14 days is new policy, not 26 days, would use 14 days for calculating new receivable , i still didn’t get across?
The question says that the new policy will result in the average period being 26 days.
Just because they are offering a discount for payment within 14 days does not mean everyone will pay in 14 days! The question (and this was a real exam question) says that on average they will take 26 days.
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