CVCITCCAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.

#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 -0139

BACHELOR OF SCIENCE IN ACCOUNTANCY/ACCOUNTING TECNOLOGY

PREFINAL EXAMINATION2nd Semester S.Y. 2014-2015

Law on Sales, Agency and Bailment

NAME:_________________________________________________ SCORE: _______________COURSE:______________________________________________ DATE: _________________

GENERAL INSTRUCTION: No permit NO EXAM.

Test I: Multiple ChoicesInstructions: Choose the BEST answer for each of the following items. Encircle only one answer using black pen. Strictly no erasure allowed.

Receivables managementCarrying cost

1. The Camp Company has an inventory conversion period of 60 days, a receivable conversion period of 30 days, and a payable payment period of 45 days. The Camp’s variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost of capital for Camp is 12%.

If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying cost on accounts receivable, using 360 days year?A. P281,250 C. P 20,250B. P168,750 D. P 56,250

Average receivables2. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty percent of the customers

pay on the tenth day and take discounts; the other 60 percent pay, on average, 45 days after their purchases.

What is the average amount of receivables?A. P70,000 C. P77,200B. P77,500 D. P67,500

3. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to standards will result in an expected increase in the average accounts receivable balance of

A. P 540,000 C. P2,700,000

B. P 900,000 D. P1,620,000

Investment in receivables4. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection period is 45 days, and bad

debts are 3 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 1.5 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent and 360 days per year.

What would be the decrease in investment in receivables if the change were made?A. P 9,688 C. P 96,875B. P 12,988 D. P129,975

Comprehensive

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Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s income tax rate is 40 percent.

5. What are the days sales outstanding (DSO) before and after the change of credit policy?A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectivelyB. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively

6. The incremental carrying cost on receivable isA. P 843.75 C. P 643.75B. P8,889.00 D. P6,667.00

7. The incremental after tax profit from the change in credit terms isA. P68,493 C. P60,615B. P65,640 D. P57,615

8. Manila Company needs to pay a supplier’s invoice of P60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum with a 9% compensating balance. Assume a 360-day year.

The amount Manila Company must borrow to pay the supplier within the discount period and cover the compensating balance is

a. P60,000b. P 65,934c. P64,615d. P58,800

9. A company has just borrowed P 2 million from a bank. The stated rate of interest is 10%. If the loan is discounted and is repayable in one year, the effective rate on the loan is approximately

a. 8.89%b. 9.09%c. 10.00%d. 11.11%

10. Explain the concept of receivable management.

God Bless

Prepared By:

GLYN A. FABROS, CPABSAT-Program Chairman

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