A company had the following partial list of account balances at year-end: $$\begin{array} { | l | r | }
\hline \text { Sales returns and allowances } & \$ 500 \
\hline \text { Trade receivables } & 9,000 \
\hline \text { Sales discounts } & 700 \
\hline \text { Sales revenues } & 57,200 \
\hline \text { Allowance for doubtful accounts } & 300 \
\hline
\end{array}$$
-A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. What is the approximate annual rate?
A) 18%.
B) 25%.
C) 38%.
D) 56%.

Question

A company had the following partial list of account balances at year-end: $$\begin{array} { | l | r | } 
\hline \text { Sales returns and allowances } & \$ 500 \
\hline \text { Trade receivables } & 9,000 \
\hline \text { Sales discounts } & 700 \
\hline \text { Sales revenues } & 57,200 \
\hline \text { Allowance for doubtful accounts } & 300 \
\hline
\end{array}$$ 
-A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. What is the approximate annual rate?
A) 18%.
B) 25%.
C) 38%.
D) 56%.

Quizplus · Accepted Answer

Calculation: [($3 ÷ $97) ÷ 30 days] × 365 days = .38.

A Company Had the Following Partial List of Account Balances