2017: Question 5

5.1 Corenza Furnishers is considering extending credit to some customers who may be at risk of defaulting in payment. Sales will increase by R470 000 if credit is granted to these customers. From the new accounts receivable generated, 10% is expected to be uncollectible. Additional collection costs will be 4% of sales, and the production and selling costs will be 70% of sales. The company tax rate is 28%.

Required:

Required: 5.1.1 Calculate the incremental profit/loss after tax. (7 marks) 5.1.2 Determine the incremental return on sales if these new credit customers are accepted. (3 marks) 5.1.3 Briefly explain any 3 methods used to collect overdue accounts. (3 marks)

5.2 Jabu Shoes Ltd, a supplier of casual shoes stock records are presented in the table below:

Closing inventory of 70 units at R150 each on 31 December 2015

60 units at R160 each, was purchased on 30 May 2016

55 units at R170 each, was purchased on 31 October 2016

During the year (Jan-Dec 2016) 130 pairs were sold at R200 each

Calculate the value of closing inventory as at 31 December 2016 and gross profit for the year ended 31 December 2016 using the first in first out (FIFO) method. (7marks)