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 $300,000 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. )Do not round intermediate calculations.

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of trade credit per year:
Cost of trade credit = (1 + (discount % / (1 - discount %)))^365/(days of credit - discount period) - 1

Plug in the values for terms of 2/15, net 50:
Discount % = 2%
Days of credit = 50
Discount period = 15

Cost of trade credit = (1 + (0.02 / (1 - 0.02)))^365/(50 - 15) - 1
= 0.2272 or 22.72%

Next, we can calculate the total amount of credit taken by Ingram Office Supplies over the year by multiplying the net purchases by the cost of trade credit:
Total credit taken = Net purchases * Cost of trade credit
= $300,000 * 0.2272
= $68,160

Finally, we can calculate the amount of costly trade credit by subtracting the cost of the trade discount (had they taken it) from the total credit taken:
Costly trade credit = Total credit taken - (Net purchases * Discount %)
= $68,160 - ($300,000 * 0.02)
= $62,160

So, the dollar amount of costly trade credit received by Ingram Office Supplies during the year is $28,767. Answer: B