Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases.Quickbow is considering borrowing from its bank,using notes payable,in order to take trade discounts.The firm wants to determine the effect of this policy change on its net income.The standard industry credit terms offered by all its suppliers are 2/10,net 30 days,and Quickbow pays in 30 days.Its net purchases are $11,760 per day,using a 360-day year.The rate on the notes payable is 10 percent and the firm's tax rate is 40 percent.If the firm implements the plan,what is the expected change in Quickbow's net income?
A) −$23,520
B) −$32,160
C) +$23,520
D) +$37,728
E) +$62,880

Question

Quizplus · Accepted Answer

The expected change in Quickbow's net income can be calculated by first determining the savings from taking the trade discounts and then subtracting the interest expense on the notes payable, adjusted for the tax effect. Savings from discounts = $11,760 * 2% * 360 = $84,672 annually.Interest expense on the notes payable = ($11,760 * 360) * 10% = $423,360 * 10% = $42,336 annually.After-tax interest expense = $42,336 * (1 - 0.40) = $42,336 * 0.60 = $25,401.6.Net increase in income = Savings from discounts - After-tax interest expense = $84,672 - $25,401.6 = $59,270.4.However, since this option is not available, the closest correct answer based on the calculation method provided is D) +$37,728, indicating a possible miscalculation in the explanation provided. The correct calculation involves understanding the cost of not taking the discount versus the cost of borrowing to take the discount, and then adjusting for the tax impact. The discrepancy suggests a need to reevaluate the calculation steps or assumptions made.

Quickbow Company Currently Uses Maximum Trade Credit by Not Taking