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 This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.

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May 6, 2019 at 11:37 am #515067josephee
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There have benn the same type of question on june 2011 and december 2013 based on the working capital for accepting or rejecting discounts offered by suppliers, the exam solutions for june 2011 does not consider discount in computation of trade payables while the later considers discount, which approach was corre
Thursday 9 June 2011 – trade payables after discount does not consider discount
Annual demand is 120,000 components. The current terms are payment in full within 90 days, which ZPS Co meets, and the cost per component is $7·50—The supplier has offered either a discount of 0·5% for payment in full within 30 days—Assume that there are 365 days in the year and that ZPS Co can borrow shortterm at 4·5% per year
Early settlement discount
Annual cost of components = 120,000 x 7·50 = $900,000 per year
Value of discount offered = 900,000 x 0·005 = $4,500Current level of payables = 900,000 x 90/365 = $221,918
Revised level of payables = 900,000 x 30/365 = $73,973
Reduction in payables = 221,918 – 73,973 = $147,945
Increase in financing cost by taking discount = 147,945 x 0·045 = $6,657Net value of offer of discount $4500 – $6657 = $2,157
Friday 6 December 2013 – trade payables after discount considers discount
The annual demand for Product Q is 456,000 units per year and Plot Co buys in this product at $1 per unit on 60 days credit. The supplier has offered an early settlement discount of 1% for settlement of invoices within 30 days—Plot Co finances working capital with shortterm finance costing 5% per year. Assume that there are 365 days in each year.
Product Q trade payables at end of year = 456,000 x 1 x 60/365 = $74,959
Product Q trade payables after discount = 456,000 x 1 x 0·99 x 30/365 = $37,105
Decrease in Product Q trade payables = 74,959 – 37,105 = $37,854
Increase in financing cost = 37,854 x 0·05 = $1,893
Value of discount = 456,000 x 0·01 = $4,560
Net value of offer of discount = 4,560 – 1,893 = $2,667May 6, 2019 at 2:01 pm #515090John MoffatKeymaster Topics: 57
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Please do not give links to pirate websites – it is illegal and the ACCA gets angry because the exams are copyright of the ACCA. For that reason I have deleted the link.
As I state in my free lectures, there are arguments both ways as regards the discount and the examiner always accepts either answer (and the difference is only ever small).
May 6, 2019 at 6:20 pm #515120josephee Topics: 7
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@johnmoffat said:
Please do not give links to pirate websites – it is illegal and the ACCA gets angry because the exams are copyright of the ACCA. For that reason I have deleted the link.As I state in my free lectures, there are arguments both ways as regards the discount and the examiner always accepts either answer (and the difference is only ever small).
I appologize for posting links and wont happen again.
So which of the two options is practically feasible?
Should the computation for trade payables include the amount of credit purchases after discount or take credit purchases before discount
May 7, 2019 at 2:25 pm #515222John MoffatKeymaster Topics: 57
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I don’t know what you mean by ‘practically feasible’. Offering s discount is obviously feasible and that is the only practical aspect.
As far as the arithmetic is concerned, it is debatable – that is why the examiner always allows either approach.
(and the difference will only ever be relatively small. In practice the difference will be irrelevant to the decision 🙂 )

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