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KXP Co had sales $15 million. All sales were on a 30 days’ credit to commercial customers.
Extract of the company:
T Receivables $ 2,466,000
T Payables $ 2,220,000
Overdraft $ 3,000,000KXP co proposes introducing an early settlement discount of 1% for payment within 30 days, while increasing its normal credit to 45 days. It is expected that 50% will take discount, 30% will pay after 45 days and 20% will not change their current paying behaviour.
While calculating the revised trade receivables for the customers taking the discount should the discount be deducted or not? Should it be $15m*0.5*30 / 365 or $15m*0.5*30*0.99 / 365?
There are arguments for both and the examiner himself sometimes subtracts the discount and sometimes does not (you will obviously have seen in his answer what he has done in regard to this question).
He has said that you will get full marks whether you subtract it or not (provided obviously everything else is done correctly) – I do actually make this point in my free lectures on this. Obviously the final answer will be different (but not a lot different). However in this sort of question the marks are always for the workings, not for the final answer.
(Which is why in Section C of the exam it is so important that your workings are easy for the marker to follow – whatever topic is examined in the question)
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