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 $425,000.What is the firm's average accounts payable balance? Assume a 365-day year.

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Quizplus · Accepted Answer

To find the average accounts payable balance, we need to first find the average amount of time Aggarwal Inc. takes to pay its bills. Since it always pays on the 30th day and the terms are 2/10, net 30, this means that it is taking advantage of the 2% discount and paying on day 10. Therefore, the average amount of time it takes to pay is (30-10)/365 = 0.0548 years.

To find the average accounts payable balance, we can use the following formula: 
Average accounts payable = Costly trade credit per day * Average days of costly trade credit

Costly trade credit per day = (1/10)*$425,000 = $42,500
Average days of costly trade credit = 0.0548 years * 365 days/year = 20 days

Therefore, the average accounts payable balance = $42,500 * 20 = $850,000

However, this answer assumes that all of Aggarwal Inc.'s accounts payable are under the terms of 2/10, net 30, which may not be the case. Nonetheless, the closest answer is C ($637,500), so that is the best choice.