Ingram Office Supplies,Inc.,buys on terms of 2/15,net 50 days.It does not take discounts,and it typically pays on time,50 days after the invoice date.Net purchases amount to $450,000 per year.On average,what is the dollar amount of costly trade credit (total credit − free credit)the firm receives during the year? (Assume a 365-day year,and note that purchases are net of discounts.)

Question

Quizplus · Accepted Answer

The correct answer is A. The firm receives credit for 50 days, but it could get a discount if it paid within 15 days. So, the costly trade credit is the difference between the total credit and the free credit. The total credit is the amount of the invoice, which is $450,000. The free credit is the amount of the discount, which is 2% of $450,000, or $9,000. Therefore, the costly trade credit is $450,000 - $9,000 = $441,000. The average daily balance is $441,000 / 365 = $1,208.22. The dollar amount of costly trade credit is $1,208.22 * 50 = $60,411. However, the question asks for the dollar amount of costly trade credit, not the average daily balance. Therefore, the answer is $60,411 * 365 / 50 = $43,150.82, which is rounded to $43,151.