East Street Automotive Repair received an invoice amounting to $1,406 with cash terms of 3/15 dated February 27. If a partial payment of $750 is made on March 10, find the balance due on the invoice. Select one: a. $656 b. $773.20 c. $633.50 d. $632.80 Solution The Invoice amount 1406 Payment -750 Balance to be paid 656 If the full payment is made within 15 days then discount of 3% will be availed The correct option is a. $ 656.

1. Eastern Electronics headquartered out of Berlin Germany was a cottage industry that prospered
after the unification of Germany and the growth of the electronics era. Hans Schmidt, owner of
the company, has enjoyed good growth over the last several years. With sales concentrated
primarily in Germany, Austria, Poland, and the Czeck Republic.
Hans saw that he had a limited market in the eastern European countries and that his company
was facing stiff competition from other electronic firms in Europe as well as from companies in
the United States, Korea and Japan. In order to grow in size and statue and remain competitive in
this industry, Hans knew he had to expand his market into other countries.
In 20x3, Hans had a vision to aggressively market and sell electronic components in the recently
liberated Russian republics. He hired Alex Demeshkin, a computer and marketing expert, to
introduce sales to the Ukraine, Georgia, and the western area of Russia. Hans felt that he could
compete effectively in these new countries, even though they were relatively unfamiliar with a
capitalist system. Eastern Electronics had the advantage of location, with relatively easy
distribution to the former Soviet countries. He also produced high quality products indicative of
precise German engineering standards. Hans believed that the customers in the former Soviet
countries would appreciate and pay for quality, especially as they were transitioning to a
capitalistic form of economics. Businesses could not afford to have less than satisfactory
electronic systems that might not perform appropriately as new business practices and
procedures were being implemented.
Alex had numerous connections in the former Soviet countries and also had instant credibility
because of his technical expertise. He was able to represent the Eastern Electronics products very
well and illustrate how the potential customers would greatly benefit from the services of
Eastern. While financial results started slowly in 20x4, it was evident by 20x6 that the majority
of the growth in sales for Eastern Electronics was coming from the work that Alex was doing in
the former Soviet countries. Also, the budget projections for 20x7 and 20x8 also showed
continued good growth in the former Soviet countries with only limited growth in the European
market. Indeed the expansion into the former Soviet countries was critical to the immediate
success of Eastern Electronics.
Alex was being paid a flat salary of Euro $40,000 plus a commission of 9.0% of the annual sales
increase in the former Soviet countries. In 20x6, his salary would be Euro $149,800 or Euro
$40,000 plus (3,780,000 – 2,560,000)0.09 = Euro $149,800. He had implemented some very
creative processes to stimulate sales to the former Soviet countries during this time of economic
conversion and opportunity. Since it was very difficult for new start up companies in the former
Soviet countries to obtain necessary capital for asset acquisition, Alex provided short-term
capital in the form of inventory and accounts receivable policy.

2. The general terms for payment on account with customers in the European countries was 2/10
net 40. Those customers often paid within the ten-day discount period to take advantage of the
favorable discount terms. However, customers in the former Soviet countries did not have a
favorable cash flow situation and rarely were able to pay in the short ten-day discount period. In
fact, customers had great difficulty paying in the 40 day time period. Therefore Alex offered
credit terms of 2/10 net 80 and often unofficially extended the terms to 90 days.
These new start up companies really appreciated the generosity of Alex which allowed them to
purchase the electronic components from Alex and then sell them to other customers within the
country and collect on the sales before having to pay Eastern Electronics. That way these
companies did not have to seek short-term financing from the banking institutions and be forced
to pay unfavorable interest rates. Also, it allowed the customers in the former Soviet countries
more favorable opportunities in the currency exchange process. Since they had more time before
payment was due, and they could essentially use customer’s money versus their own. These
companies could minimize the number of currency exchange transactions they needed to make in
their payments to Eastern. Given that companies generally lose at the minimum an exchange rate
fee, every time a currency exchange is made, the customers in the former Soviet countries were
very supportive of Alex’s arrangements.
Alex felt that Eastern Electronics had a strong enough cash flow situation, and certainly stronger
than these companies, to provide these sales terms. Furthermore, this was only a one time hit to
Eastern Electronics of extending the payment terms by about 50 days. Once a sales pattern and
resulting payments was established, the differentiation offset itself. Besides, this collection
policy gave Eastern a competitive advantage in securing sales in these former Soviet countries.
The obvious increase in sales volume easily offset any concerns regarding repayment.
Alex also helped the new companies in carrying inventory. He arranged to ship a majority of the
inventory to the companies generally after these companies had made their sales to other
customers. Sometimes Alex could even have Eastern Electronics ship directly to the customers
of the new companies if the orders were of a sufficient quantity. This often eliminated one
shipment, and saved Alex’s customers time and money.
With the big problem of theft in the former Soviet countries, the customers of Alex were very
concerned about carrying a large inventory of highly desirable Eastern Electronic products at a
storefront location. The capital cost for these new companies to provide secure inventory storage
for a large amount of product was often prohibitive for the new companies. Since Alex was able
to cut down the requirements of inventory, he is in a sense providing no cost start up inventory
capital to the companies in the former Soviet countries.
The inventory policy offered by Alex also gave Eastern Electronics a competitive advantage
especially over companies from countries like Japan, Korea and the United States. The new

3. companies in the former Soviet countries especially liked the way Alex was watching out for
their best interest. They felt Alex was a comrade who was really looking out for them as they
started their companies. They rewarded Alex with increasing levels of sales orders, and the sales
projections for the next two years look particularly promising.
With the continual increase in sales levels, Eastern electronics is looking to make some capital
expansion of their own. Eastern is nearing capacity limitations on production and storage
facilities. Given the anticipated growth in the former Soviet market, it is possible that Eastern
will consider building a major storage facility in the Ukraine. Such an action will also help to
show their commitment to their expansion program with the former Soviet countries and could
allow them further expansion into countries like Kazakhstan and Uzbekistan even beyond to the
east. Hans sees these areas as untapped markets and with the modernization of some of the more
Arab nations, he wants to get a foothold in these markets as soon as the opportunities are
available.
Hans is very pleased with the work Alex has done to open the markets in the former Soviet
countries and is considering a significant raise in both the base salary and commission rate for
him beginning in 20x7. He is also excited about the growth opportunities and wants to pursue a
capital expansion program so Eastern electronics can meet the anticipated demand increases for
the next five years. He feels he can get some very favorable financing rates with the German
National Bank of 11.5% for secured capital loans, and there is always the use of internally
generated funds and maybe new external funds to support a growth opportunity.
Financial statements for the years of operation from 20x3 to 20x6 along with the projected
budgets for 20x7 and 20x8 are presented as follows.
Eastern Electronics
Income Statement
For the years Ending December 31, 20x3 – 20x8
Years 20x7 and 20x8 are Budget Projections
All amounts in Euro $100,000
Account
20x3
20x4
20x5
20x6
20x7
20x8
Sales – Europe
156.4

4. 158.0
162.0
167.0
172.0
177.2
Sales – Russia
-
6.2
25.6
37.8
54.8
71.2
Net Sales
156.4
164.2
187.6
204.8
226.8
248.4
Operating Expenses
Production
81.4
86.8
100.4
112.6
130.8
142.6
Admin & Selling
31.4
32.0
37.4
40.4
42.0
48.0
Depreciation
9.2

5. 10.8
14.8
15.4
15.4
17.0
Excise Duties
23.0
22.4
23.4
23.8
24.4
25.2
Total Operating Exp
145.0
152.0
176.0
192.2
212.6
232.8
Operating Margin
11.4
12.2
11.6
12.6
14.2
15.6
Other Expenses
Interest Expense
1.6
1.6
4.6
4.2
4.8
5.4
Earnings before Tax
9.8

6. 10.6
7.0
8.4
9.4
10.2
Income Tax
3.4
3.6
2.8
3.2
3.2
3.6
Net Earnings
6.4
7.0
4.2
5.2
6.2
6.6
Dividends
4.8
5.2
3.0
4.2
4.8
4.8
Retention of Earnings
1.6
1.8
1.2
1.0
1.4
1.8
Eastern Electronics
Balance Sheet
As of December 31, 20x3 – 20x8

7. Years 20x7 and 20x8 are Budget Projections
All amounts in Euro $100,000
Account
20x3
20x4
20x5
20x6
20x7
20x8
Assets
Cash
13.6
20.0
22.4
24.6
27.0
29.8
Accounts Receivable
Europe
17.4
18.0
18.2
19.0
19.4
19.8
Russia
0
0.6
6.0
9.0
13.4
17.6
Allowance
-0.2
-0.2
-0.2

8. -0.2
-0.6
-0.8
Inventory
15.4
15.8
18.0
28.6
31.8
34.8
Total Current Assets
46.2
54.2
64.4
81.0
91.0
101.2
Property, Plant & Equi
147.4
147.4
153.0
153.0
170.8
188.0
Accum Depreciation
-59.0
-69.8
-84.6
-100.0
-115.4
-132.4
PP & E Net
88.4
77.6
68.4
53.0

9. 55.4
55.6
Long-Term Invest
7.8
7.8
7.8
7.8
6.0
6.0
Total Long-Term
96.2
85.4
76.2
60.8
61.4
61.6
Total Assets
142.4
139.6
140.6
141.8
152.4
162.8
Liabilities & Equity
Accounts Payable
9.0
9.2
9.4
10.6
11.4
12.4
Short-Term Notes
7.6
14.4
15.2
15.8

10. 25.6
34.6
Other Current Liab
18.6
18.0
20.6
22.6
25.0
27.2
Total Current Liab
35.2
41.6
45.2
49.0
62.0
74.2
Long-Term Notes
40.6
29.6
25.8
22.2
18.4
14.8
Total Liabilities
75.8
71.2
71.0
71.2
80.4
89.0
Stockholders Equity
60.0
60.0
60.0
60.0
60.0

11. 60.0
Retained Earnings
6.6
8.4
9.6
10.6
12.0
13.8
Total Liab & Equity
142.4
139.6
140.6
141.8
152.4
162.8
There are 60,000 shares of closely held stock outstanding in the company.
Q5:
Should Eastern Electronics undergo their proposed capital expansion program, especially with
their focus in the former Soviet countries? Why or why not?
Account
20x3
20x4
20x5
20x6
20x7
20x8
Sales – Europe
156.4
158.0
162.0
167.0
172.0
177.2
Sales – Russia
-
6.2

12. 25.6
37.8
54.8
71.2
Net Sales
156.4
164.2
187.6
204.8
226.8
248.4
Operating Expenses
Production
81.4
86.8
100.4
112.6
130.8
142.6
Admin & Selling
31.4
32.0
37.4
40.4
42.0
48.0
Depreciation
9.2
10.8
14.8
15.4
15.4
17.0
Excise Duties
23.0
22.4

13. 23.4
23.8
24.4
25.2
Total Operating Exp
145.0
152.0
176.0
192.2
212.6
232.8
Operating Margin
11.4
12.2
11.6
12.6
14.2
15.6
Other Expenses
Interest Expense
1.6
1.6
4.6
4.2
4.8
5.4
Earnings before Tax
9.8
10.6
7.0
8.4
9.4
10.2
Income Tax
3.4
3.6

14. 2.8
3.2
3.2
3.6
Net Earnings
6.4
7.0
4.2
5.2
6.2
6.6
Dividends
4.8
5.2
3.0
4.2
4.8
4.8
Retention of Earnings
1.6
1.8
1.2
1.0
1.4
1.8
Solution