Longer Payment Periods

Background The largest 1,000 U.S. companies increased payment delays from 40.1 days to 56.7 days in the last ten years. (Hackett Group) Proctor and Gamble (P&G) renegotiated its payment period from 45 days to 75 days with many of its suppliers. Johnson & Johnson (J&J) increased its payment period from 30 days to 75 days. Suppliers are struggling to manage these payment delays.

Multiple Choice Questions 1. Compute the amount to be paid for an invoice received by Proctor and Gamble for $10,000 of merchandise, terms of 2/10, n/75. Assume that Proctor and Gamble pays within the discount period. a. $9,800 b. $10,000 c. $8,000 d. $9,600

Multiple Choice Questions 2. Proctor and Gamble acquired $10,000 of goods on credit, terms 2/10, n/75. Prepare the entry to record Proctor and Gamble’s payment within the discount period. a. Accounts Payable                         $10,000         Merchandise Inventory                           $10,000 b. Accounts Payable                         $10,000          Merchandise Inventory                           $200          Cash                                                             $9,800 c. Accounts Payable                            $9,800          Cash                                                            $9,800 d. Accounts Payable                            $9,800     Merchandise Inventory                 $200            Cash                                                          $10,000

Discussion Questions 3. Discuss what options a supplier has to encourage early payment from buyers for credit sales. 4. Explain why companies such as P&G and J&J typically wait until the end of the payment period to make payments to suppliers.