Safety Window and Door Co.buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $450,000 per year.On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)
A) $18,493
B) $19,418
C) $20,389
D) $21,408
E) $22,479

Question

Quizplus · Accepted Answer

The formula for calculating the free trade credit is:

Discount period / (1 - Discount %) - Discount period

Discount period = 15 days
Discount % = 2/100 = 0.02

Free trade credit = (15 / (1 - 0.02) - 15) x (Net purchases / 365)
Free trade credit = $18,493.15