Managing Accounts Payable – Practice Question
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Practice question
A company wants to approximate the 12% annual interest rate it pays on its working capital loan, based on a 365-day year. Which of the following credit terms should the company offer its customers?
- A) 2.00%, 15, net 45
- B) 1.00%, 15, net 45
- C) 0.75%, 10, net 30
- D) 0.50%, 10, net 30
What is the formula?
This tests the cost of not taking a cash discount — the implied annual interest rate a company pays by waiting until the net due date instead of paying early for the discount:
Days foregone is the gap between the discount period and the net period — the extra days you keep the cash by skipping the discount.
Solving it step by step
For terms like "2/15, net 45," the discount period is 15 days and the net period is 45 days, so the company gives up 30 days (45 − 15) by not taking the discount.
| Option | Terms | Days Foregone | Periods/Year | Effective Rate | Annual Rate |
|---|---|---|---|---|---|
| A | 2/15, net 45 | 30 | 12.17 | 2.04% | ~25% |
| B | 1/15, net 45 | 30 | 12.17 | 1.01% | ~12% |
| C | 0.75/10, net 30 | 20 | 18.25 | 0.76% | ~14% |
| D | 0.50/10, net 30 | 20 | 18.25 | 0.50% | ~9% |
Walking through option B: the discount period runs 15 days, with 45 days to pay in full, so 30 days are foregone by skipping the discount. There are 365 ÷ 30 = 12.17 such periods in a year. The effective discount rate is 1% ÷ 99% = 1.01%. Multiplying: 12.17 × 1.01% ≈ 12% — matching the target annual rate exactly.
The correct answer is B: 1.00%, 15, net 45. Only this option's implied annual cost of forgoing the discount lands at 12%; the others compute to roughly 25%, 14%, and 9%, respectively.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.