Your firm purchases goods from its supplier on terms of 2/10, net 40

Accounting Jan 20, 2021

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to: 15.9% 11.1% 20.1% 13.0%

Expert Solution

Answer :

Answer = option A = 15.9%

Explanation:

Interest rate per year would be equal to = 2/(100-2)

= 2/98

Hence effective annual costs would be taken for days that the payments have been delayed

i.e., (60-10) = 50

Hence Effective costs = [(1+interest rate )^time period -1]*100

= [((1+(2/98))^(365/50))-1]*100

= 15.89%

= 15.9% (approx)

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