Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? Assume a 365-day year.
A)$458,160
B)$482,273
C)$507,656
D)$534,375
E)$562,500

Question

Quizplus · Accepted Answer

The firm forgoes the discount and pays on the 30th day, so it uses 20 days of free credit and 10 days of costly credit. The average accounts payable balance includes both free and costly credit. The costly trade credit is $375,000, which is for 10 days. Therefore, the total accounts payable balance for 30 days is $375,000 * (30/10) = $1,125,000. The average accounts payable balance is $1,125,000 / 2 = $562,500.