Detailed Answer
(b) The requirement is to calculate the weightedaverage
annual interest rate for trade credit. If the company does
not pay Web Master within the discount period, it will incur
interest costs of $500 ($25,000 × 2%). This results in an
annualized interest rate of 36.7347% [($500 ÷ $24,500) × 360
days ÷ (30 – 10 days)]. If the company does not pay the Softidee
account during the discount period, it will incur interest cost of
$2,500 ($50,000 × 5%). This results in an annualized interest
rate of 23.6842% [($2,500 ÷ $47,500) × 360 days ÷ (90 – 10
days)]. To determine the weighted-average interest rate, we
must first determine the average amount borrowed. For Web
Master, this is equal to $24,500 × (20 days ÷ 360 days) =
$1,361.11, and for Softidee, it is equal to $47,500 × (80 days ÷
360 days) = $10,555.56. Therefore, the weighted-average
interest rate is equal to 25.2% {[(36.7347% × $1,361.11) +
(23.6842% × $10,555.56)] ÷ ($1,361.11 + $10,555.56)}.
Answer (a) is incorrect because it uses weights of $25,000 and
$50,000. Answer (c) is incorrect because it is based on weights
of $24,500 and $47,500. Answer (d) is incorrect because it is the
unweighted-average of the two rates.