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help on credit management question.

danielkdanielk New MemberRegistered Posts: 12
hi everyone, here is a question and answer from the osborne book, whic i dont get how the total is comprised.
QUESTION:
your business is owed £1000 (plus VAT @ 20%). the debt is 60 days late. bank of england base rate is 2%

ANSWER:
interest formula amount including VAT x (base rate + 2%) x no. of days/365
= 1,200 x 0.10 x 0.16 = £192 interest which can be charged?????
i make the answer to be £19.73 (rounded to 2 D.P's)
???? i don't understand, anyone?
thank you dan

Comments

  • janwaljanwal Experienced Mentor Registered Posts: 1,189
    Hi Dan

    If you do the equation as a full I get same answer as you. But the rule is do different calculations separate:

    1000 + 20% VAT = 1200
    base rate 8% + 2% = 10%

    1200 x .10 = 120

    no of days late 60/365 = .16

    120 x .16 = £19.20

    Hope this helps

    When is your exam, mine is 18th April

    Jan
  • danielkdanielk New Member Registered Posts: 12
    the £19.20 i agree with you.
    but their answer is £192?
    is this is an error on there part.
    or are they doing 19.20 x 10 as its 60 days old i.e. 2 months and 12 months less 2 months gives us the 10???
    confused on this one. I just thought the answer is £19.20 not £192?
    regards
    dan
  • SandyHoodSandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    As an additional consideration
    For an outstanding invoice of £1,200
    Interest of £19.20 PLUS compensation of £70.00 can be added to the amount due from the customer
    AND
    this only applies to business to business transactions
    Sandy
    [email protected]
    www.sandyhood.com
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