Trade Credit
Average Accounts Payable:
Annual purchase
360 X
Cost of discount forgone:
Discount %
100% - Discount % X
Discount
Purchase price - Discount X
360
Credit Period
360
Final due date - Discount period
Discount
( Credit period - Discount period )
Stretching of Payables
Cost of discount forgone (1.0%)/(100%
= − 1.0%) 𝑥 360/
(30−10)
if the seller gave credit term
of 1/10, n/30 = 18.18%
Cost of discount forgone (1.0%)/(100%
= − 1.0%) 𝑥 360/
(45−10)
if the seller gave credit termof 1/10, n/30
and chose to pay on the 45th day = 10.39%
Accruals
Formula I = Prt
Term: Date
P = 1,000,000 15 days 1. March
r= 12% 30 days 2. March
t= 15 , 30 , 45 45 days 3. April 1
Formula Total Interest
1,000,000 x 0.12 x 15/360 5,000.00
1,000,000 x 0.12 x 30/360 10,000.00
1,000,000 x 0.12 x 45/360 15,000.00
Straight - line method
Example
On January 1, 2012,RCBC credited the account of
Phoenix Corporation for the amount of 120,000.
The principal is payable in 4 equal quarterly
payments plus interest based on the outstanding
balance. An amortization table shows the
principal and interest payments. Assume that the
interest rate is 12% per annum and that payment
starts on April 1.
Answer
Phoenix Corporation
Amortization Table
Principal Interest Total Outsatnding
Date payment Payment Payment Balance
1/1/2012 ₱ 120,000.00
1/2/2012 30,000 3,600 33,600 90,000
1/3/2012 30,000 2,700 32,700 60,000
1/4/2012 30,000 1,800 31,800 30,000
1/5/2012 30,000 900 30,900 0
Scientific Method
total loan Periodic Payment 1-(1 + i )ⁿ
i
120,000 ₌ x 1- (1.03)⁻⁴
0.03
120,000 ₌ x (3.717)
x ₌ ₱120,000
3.717
₱32,284
Amount to be borrowed = Amount needed/(1-c)
c=compensating balance
Gilmore Corporation needs 250,000.00 to bridge the gap in their working capital. Bonifacio Bank is willing to give Gilmore a loa
Answer: 250,000.00/(1-0.20)
312,500.00
ank is willing to give Gilmore a loan but requires a compensating balance of 20%. How much is the amount to be borrowed to meet the cor
to be borrowed to meet the corporations's need?
1. Add-on Interest
= Principal + Interest
= ₱ 150,000 + ₱ 4,500
= ₱ 154,500
The payment on the face value of the loan is increased by the amount of the interest.
2. Discounted interest
Example:
Assume a loan of ₱ 150,000 with a discount rate of 12% for 90 days. Compute for the interest and
discounted amount of the loan. Using 360 days in a year, how much should be paid on the 90th day?
Interest = Principal x Rate x Time
= ₱ 150,000 x 0.12 x 90/360
= ₱ 4,500
The discounted amount is:
= Principal - Interest
= ₱ 150,000 x 0.12 x 90/360
= ₱ 145 , 000
The loan payment on the 90th day will be ₱ 150,000 ( ₱ 145, 500 + ₱ 4,500 ).
Effective rate on Add on Interest
Effective Rate Interest Days in a year
Principal X Days loan is outstanding
₱ 15,000 360
₱ 150,000 X 90
40%
Effective rate on Discounted Interest
Effective Rate Interest Days in a year
Principal - Interest X Days loan is outstanding
₱15,000 360
₱150,000 - ₱15,000 90
44.44%
Effective rate on installment loan
2 x Annual no. of payments x Interest
(Total no. of payments + 1 ) principal
2 x 12 x 1,800
13 x 15,000
43,200
195,000
22.15%
Effective rate with Compensating Balance
Effective rate Interest rate Effective rate
(1-c)
0.09
(1-0.15)
0.09
0.85
10.59%
interest Days in a year
Principal-c X Days loan is outstanding
100 360
1000-100 X 120
0.1111 X 3
3.33%
Assignment of Accounts Receivable
Example:
ACD Company assigned 500,000 php of its accounts
receivable to RCBC under a notification arrangement.
RCBC loans 80% less 4% service charge and 3%
commission on the gross amount assigned. ACD signed
a promissory note that provides for 12% interest on the
advances. The assignee made a collection of 300,000
php. The final payment will take place after six months.
What is the amount to be received by the assignor?
Answer:
Amount received by the assignor:
400,000
Advances (500,000 x .80)
Less: Service Charges (500,000 x 0.04) 20,000
Commission (500,000 x 0.03) 15,000 35,000
Total 365,000
Factoring of Accounts Receivable
Sarah General Merchandise factors its receivables amounting to 500,000 with 5% commission to FLT Financing Corporation
An interest rate of 2.5% per month is charged on the 90% of the accounts receivable advanced by the financing company.
How much is the total cost of the factoring?
Answer:
Commission (500,000x0.05) 25,000
Add: Interest expense (500,000 x 0.09 x 0.025) 11,250
Total cost 36,250
n to FLT Financing Corporation
d by the financing company.
Discounting of Promissory Note
Heart Corporation has a note for 250,000 dated January 1, 2012. The note is due in 120 days with at 9%. If Heart Corporation s
March 31, 2012 to RCBC Capital charging a discounted rate of 5%, how much is the net proceed of the promissory nore?
Answer:
Maturity Value Face Value + interest
250,000 + (250,000 x 0.09 x 120/360)
250,000 + 75,000
257000
Discount 257,500 x 0.05 x 30/360
1072.92
Net Proceeds Maturity value - Discount
257, 500 - 1,072.92
256427.1
ith at 9%. If Heart Corporation sells the note on
d of the promissory nore?
