Chapter 27

Providing and Obtaining Credit

Problems

Assume there are two competitor firms, Limitless Inc. and Flagstaff Inc. Limitless Inc. had 3% losses last year, but 6% of Flagstaff Inc accounts receivable were uncollectible and resulted in higher losses. Can you determine which firms credit manager is performing better? Why or why not? (2pts)

Indicate by a (+), (-), or (0) whether each of the following events would most likely cause A/R, sales, and profits to increase, decrease, or be affected in an indeterminate manner. Also provide an explanation for each event and the affects. (5pts)

AR Sales Profit

a. The firm tightens its credit standards. ___ ___ ___

b. The firm loosens its credit standards. ___ ___ ___

c. The credit terms are changed from

2/10 net 30, to 3/10, net 45. ___ ___ ___

d. The credit manager gets tough with

past-due accounts. ___ ___ ___

Explanations:

a.

b.

c.

d.

On January 1, Flagstaff Flowers obtained a business loan from a local bank. The loan is a $25,000 interest-only loan with a nominal rate of 6.00%. Interest is calculated on a simple interest basis with a 365-day year. What is the interest charge for the first month (assuming 31 days in the month)? You must show all calculations to receive credit. (1pt)

Lucy Love, owner of Loves Laundry, is negotiating with Arizona Credit Union (ACU) for a 1-year loan of $30,000. ACU has offered Love the alternatives listed below. Calculate the effective annual interest rate for each alternative. You must show calculations to receive full credit.

A 4.00% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year. (0.5pts)

A 6.00% annual rate on a simple interest loan, with a 15% compensating balance required and interest due at the end of the year. (1pt)

An 7.50% annual rate on a discounted loan, with a 10% compensating balance. (1pt)

Blue Belt Co. is a small manufacturer of belts that began operations on January 1. Its credit sales for the first 6 months of operations were as follows:

Month Credit Sales

January $100,000

February 110,000

March 120,000

April 115,000

May 120,000

June 160,000

Throughout this entire period, the firms credit customers maintained a constant payments pattern; 25% paid in the month of sale, 50% paid in the first month following the sale, and 25% paid in the second month following the sale.

What was Blue Belts receivables balance at the end of March and at the end of June? (You must show calculations to receive full credit. (2pts)

Assume 90 days per calendar quarter. What were the ADS and DSO for the first and second quarter? You must show calculations to receive full credit. (2pts)

Construct an aging schedule as of March 31 and June 30. Use account ages of 0-30, 31-60, and 61-90 days. You must show calculations to receive full credit. (4pts)

Construct the uncollected balances schedule for the first and second quarter. You must show calculations to receive full credit. (4pts)