Cash

McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved

Chapter 7

Discounts: Trade and CashDiscounts: Trade and Cash

7-2

1. Calculate single trade discounts with formulas and complements

2. Explain the freight terms FOB shipping point and FOB destination

3. Find list price when net price and trade discount rate are known

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

Discounts: Trade and Cash#7#7Learning Unit ObjectivesTrade Discounts—Single and Chain (Includes Discussion of Freight)

LU7.1LU7.1

7-3

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

2. Calculate outstanding balance for partial payments

Discounts: Trade and Cash#7#7Learning Unit ObjectivesCash Discounts, Credit Terms, and Partial Payments

LU7.2LU7.2

7-4

Irwin/ McGraw-Hill Publishing C. Invoice No. 55821333 Burr Ridge ParkwayBurr Ridge, Illinois 60527 Date: July 8, 2010

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 Financial Management – Block/Hirt $ 95.66 $ 4,783.00 10 Introduction to Business- Nichols $ 89.50 895.00

Total List Price $ 5,678.00 Less: Trade Discount 25% 1,419.50 Net Price $ 4,258.50 Plus: Prepaid Shipping Charge 125.00 Total Invoice Amount $ 4,383.50

Invoice

7-5

Trade Discount Amount & Net Price Formulas

Trade discount amount = List price x Trade discount rate

Net Price = List price - Trade discount amount

$5,678 - 1,419.50 = $4,258.50

$5,678 x 25% = $1,419.50

7-6

Freight Terms

FOB Shipping Point - buyer pays the freight costFOB New Jersey - The buyer in San Diego pays the freight

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

bu

ye

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seller

7-7

Complement

Complement - The difference between the single discount rate and 100%

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

75%

TradeDiscount

Complement

25%

7-8

Single Trade Discount

The price of a Macintosh Computer is $2,700. The manufacturer offers a 40% trade discount. What are the trade discount amount (TDA) and the net price?

TDA = $2,700 x .40 = $1,080

Net Price = $2,700 - $1,080 = $1,620

Using Complement

$2,700 x .60 = $1,620

7-9

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

List Price = Net Price .Complement of trade discount rate

Macintosh Computer has a $1,620 net price and a 40% trade discount. What is the list price?

100% - 40% = 60%

$1,620 .60

LP = $2,700

7-10

Chain Discounts

Two or more discounts:

20/15/10 To calculate discount

20 + 15 + 10 = 45%

Find the net price equivalent rate (multiply the complements)

100% 100% 100%

-20 -15 - 10

.80 x .85 x .90 = .612

7-11

Calculating Net Price with a Chain Discount

The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?

$15,000 $15,000 $12,000 $10,200

x .20 -3,000 - 1,800 - 1,020

$3,000 $12,000 $10,200 $9,180

x .15 x .10

$1,800 $1,020

7-12

Calculating Net Price Using Net Price Equivalent Rate

The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?

Find the net price equivalent rate (multiply the complements)

.80 x .85 x .90 = .612

$15,000 x .612 = $9,180

Trade Discount Amount

$15,000 - $9,180 = $5,820

7-13

Calculating Trade Discount Amount Using Single Equivalent Discount Rate

The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?

Find the net price equivalent rate (multiply the complements)

.80 x .85 x .90 = .612

1.00 - .612 = .388

Trade Discount Amount

$15,000 x .388 = $5,820

7-14

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.

7-15

Invoice

New Hampshire Propane Company

Date Description Qty. Price Total

Previous Balance $0.00

6/24/10 PROPANE 3.6 $3.40 $12.24

Total this invoice: $12.24

AMOUNT DUE: $12.24

Prompt Pay Discount: $0.19

Net Amount Due if RECEIVED by 7/10/10: $12.05

Due Date 7/26/10

Invoice No.004433L

Invoice Date6/26/10

7-16

Ordinary Dating Method

2/10, n/30 - “two ten, net thirty”

July 5

July 15

Aug.4

Discount Period10 Days

No DiscountDay 11 - 30

Credit Period (30 days)

$400 invoice dated July 5; terms 2/10, n/30; paid on July 11.

$400 x.02 = $8

$400 - $8 = $392

or

$400 x .98 = $392

7-17

Receipt of Goods (ROG)

3/10, n/30 ROG - Cash discount period beginswhen the buyer receives the goods

May 9

July 8

Aug. 7

Credit Period (30 days)

$900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG;

paid on July 20.

Paid 900

Missed discount

period

Invoice Date

July 18

No DiscountDay 11 - 30

Discount Period10 Days

7-18

End of Month (EOM)1/10 EOM - 1% discount, up until the 10th of the following month

July6

Aug. 1

Aug. 30

Credit Period

$600 x .01 = $6

$600 - $6 = $594

or

$600 x .99 = $594

Invoice Date

Aug. 10

$600 invoice dated July 6; terms 1/10 EOM; paid on August 10.

No Discount11th - 30th

Discount Periodends on 10th

7-19

End of Month (EOM)

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

April 29

June 1

June 30

Credit Period

Paid $800

Missed discount

period

Invoice Date

June 10

$800 invoice dated April 29; terms 2/10 EOM; paid on June 18.

Discount Periodends on 10th

No Discount10th - 30th

7-20

Partial Payment

• Molly McGrady owes $400. Molly’s terms were 2/10, n/30. Within 10 days Molly sent in a payment of $80. How much is her new balance?

100% - 2% = .98

$400 - $81.63 = $318.37

$80.98 = $81.63

1. Find the complement of discount rate

2. Divide partial payment by the complement (amount credited)

3. Subtract step 2 from the amount owed (outstanding balance)

(1-.02)