1-1. 1-2 Chapter 7 Discounts: Trade and Cash McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 7Chapter 7

Discounts: Trade and Discounts: Trade and CashCash

McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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• Calculate single trade discounts with formulas and complements

• Explain the freight terms FOB shipping point and FOB destination

• Find list price when net price and trade discount rate are known

• Calculate chain discounts with the net price equivalent rate and single equivalent discount rate

Discounts: Trade and Cash#7#7Learning Unit Objectives

Trade Discounts -- Single and ChainLU7.1LU7.1

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• List and explain typical discount periods and credit periods that a business may offer

• Calculate outstanding balance for partial payments

Discounts: Trade and Cash#7#7Learning Unit Objectives

Cash Discounts, Credit Terms, and Partial Payments

LU7.2LU7.2

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Irwin/ McGraw-Hill Publishing C. Invoice No. 55821333 Burr Ridge ParkwayBurr Ridge, Illinois 60521 Date: July 8, 2001

Ship: Two-day UPSTerms: 2/10, n/30

Sold to: North Shore Community College Bookstore1 Ferncroft RoadDanvers, MA 01923

Description Unit list price Total Amount

50 Managerial Accounting - Jones $ 59.99 $ 2,999.50 10 Marketing - McCarthy $ 58.66 586.60

Total List Price $ 3,586.10 Less: Trade Discount 25% -896.53Net Price $ 2,689.57 Plus: Prepaid Shipping Charge 65.50Total Invoice Amount $ 2,755.07

Invoice

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Trade Discount Amount & Net Price Formulas

Trade discount amount = List price x Trade discount rate

Net Price = List price - Trade discount amount

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Freight TermsFOB Shipping Point - buyer pays the freight cost

FOB California - The buyer in NJ pays the freight

FOB Destination - seller pays the freight costFOB New Jersey - The seller in CA pays the freight

buyer

se

ll

er

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Complement

Complement - The difference between the discount rate and 100%

If the trade discount is 25%, the complement is 75% (100%-25%)

75%

TradeDiscount

Complement

25%

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Single Trade Discount

30%

The price of office equipment is $3,000. The manufacturer offers a 30% trade discount. What are the trade discount amount (TDA) and the net price?

TDA = $3,000 x .30 = $900

Net Price = $3,000 - $900 = $2,100

Using Complement

$3,000 x .70 = $2,100

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Calculating List Price When Net Price and Trade Discount Rate Are Known

List Price = Net Price .Complement of trade discount rate

Office equipment has a $2,100 net price and a 30% trade discount. What is the list price?

100% - 30% = 70%

$2,100 .70

LP = $3,000

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Chain Discounts

Two or more discounts:

15/10/5 To calculate discount

15 + 10 + 5 = 30%

Find the net price equivalent rate (multiply the complements)

100% 100% 100%

-15 -10 - 5

.85 x .90 x .95 = .72675

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Chain Discounts

The price of a office furniture is $20,000. With a chain discount of 20/10/5, what is the net price?

Find the net price equivalent rate (multiply the complements)

.80 x .90 x .95 = .684

$20,000 x .684 = $13,680

Trade Discount Amount

$20,000 - $13,680 = $6,320

or find single equivalent rate

1.00 - .684 - .316

$20,000 x .316 = $6,320

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Cash Discounts

Credit Period

Time period sellers gives buyers to pay invoices

Mar. 1 Mar. 31

Time period buyer has to take advantage of cash discount

Mar. 1 Mar. 10

Discount Period

Discount for prompt payment. Not taken on freight, returned goods, sales tax, & trade discounts.

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Table 7.1 - Exact-days-in-a-year calendarDay of 31 28 31 30 31 30 31 31 30 31 30 31month Jan. Feb. Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1 1 32 60 91 121 152 182 213 244 274 305 3352 2 33 61 92 122 153 183 214 245 275 306 3363 3 34 62 93 123 154 184 215 246 276 307 3374 4 35 63 94 124 155 185 216 247 277 308 3385 5 36 64 95 125 156 186 217 248 278 309 3396 6 37 65 96 126 157 187 218 249 279 310 3407 7 38 66 97 127 158 188 219 250 280 311 3418 8 39 67 98 128 159 189 220 251 281 312 3429 9 40 68 99 129 160 190 221 252 282 313 343

10 10 41 69 100 130 161 191 222 253 283 314 34411 11 42 70 101 131 162 192 223 254 284 315 34512 12 43 71 102 132 163 193 224 255 285 316 34613 13 44 72 103 133 164 194 225 256 286 317 34714 14 45 73 104 134 165 195 226 257 287 318 34815 15 46 74 105 135 166 196 227 258 288 319 34916 16 47 75 106 136 167 197 228 259 289 320 35017 17 48 76 107 137 168 198 229 260 290 321 35118 18 49 77 108 138 169 199 230 261 291 322 35219 19 50 78 109 139 170 200 231 262 292 323 35320 20 51 79 110 140 171 201 232 263 293 324 35421 21 52 80 111 141 172 202 233 264 294 325 35522 22 53 81 112 142 173 203 234 265 295 326 35623 23 54 82 113 143 174 204 235 266 296 327 35724 24 55 83 114 144 175 205 236 267 297 328 35825 25 56 84 115 145 176 206 237 268 298 329 35926 26 57 85 116 146 177 207 238 269 299 330 36027 27 58 86 117 147 178 208 239 270 300 331 36128 28 59 87 118 148 179 209 240 271 301 332 36229 29 - 88 119 149 180 210 241 272 302 333 36330 30 - 89 120 150 181 211 242 273 303 334 36431 31 - 90 - 151 - 212 243 - 304 - 365

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Ordinary Dating Method

2/10, n/30 - “two ten, net thirty”

May 3

May 13

June2

Discount Period10 Days

No DiscountDay 11 - 30

Credit Period (30 days)

$500 invoice dated May 3; terms 2/10, n/30; paid on May 10.

$500 x.02 = $10

$500 - $10 = $490

or

$500 x .98 = $490

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Receipt of Goods (ROG)

1/10, n/30 ROG - Cash discount period beginswhen the buyer receives the goods

May 5

June 7

Aug.

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Credit Period (30 days)

$1,000 invoice dated May 5, received goods June 7; terms 1/10, n/60 ROG;

paid on June 17.

$1,000 x.01 = $10

$1,000 - $10 = $990

or

$1,000 x .99 = $990

Invoice Date

June 17

No DiscountDay 11 - 30

Discount Period10 Days

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End of Month (EOM)

2/10 EOM - 2% discount, up until the 10th of the following month

Sept.3

Oct 1

Oct. 30

Credit Period

$400 x .02 = $8

$400 - $8 = $392

or

$400 x .98 = $392

Invoice Date

Oct. 10

$400 invoice dated Sept. 3; terms 2/10 EOM; paid on October 8.

No DiscountDay 11 - 30

Discount Period10 Days

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End of Month (EOM)

2/10 EOM - Consider the “25th rule” - Skip a month

Sept.28

No.v 1

Nov. 30

Credit Period

$400 x .02 = $8

$400 - $8 = $392

or

$400 x .98 = $392

Invoice Date

Nov. 10

$400 invoice dated Sept. 28; terms 2/10 EOM; paid on November 8.

Discount Period10 Days

No DiscountDay 11 - 30

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Partial Payment• Sara owes $400. Sara’s terms were 3/10, n/30.

Within 10 days Sara sent in a payment of $100. How much is her new balance?

100% - 3% = .97

$400 - $103.09 = $296.91

$100.97 = $103.09

1. Find the complement of discount rate

2. Divide partial payment by the complement

3. Subtract step 2 from the amount owed