Chapter 07 Discounts: Trade and Cash Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 07

Discounts: Trade and CashDiscounts: Trade and Cash

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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

r

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

Aids in Calculating Credit Due Dates

Days-in-a-Month RuleThirty days has September, April, June, and November, all the

rest have 31 except February has 28, and 29 in leap years

Knuckles Months

Jan.Mar. May July Oct. Dec.Aug.

31 days: Jan., March, May, July, Aug., Oct., Dec.

Nov.Sept.

Feb.

Apr.

June

7-17

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

7-18

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

7-19

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

7-20

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

7-21

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

7-22

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)

7-23

Problem 7-23:

Solution:

NPF = .80 x .90 x .90 = .648

SED = 1 - .648 = .352

Savings = $155 x .352 = $54.36

Final Price: $155 x .648 = $100.44

7-24

Problem 7-25:

Solution:

.95 x .98 x .99 = .92169 x $625 = $576.05625

= $576.06

Net price

.07831 x $625 = $48.94

Trade discount

7-25

Problem 7-26:

Solution:

1.0000- .6873 .3127 = 31.27%

.79 x .87 =

Manufacturer A

1.0000- .6808 .3192 = 31.92%

.74 x .92 =

Manufacturer B

7-26

Problem 7-27:

Solution:

a. $5,250 - $250 = $5,000 x .97 = $4,850 + 250 freight $5,100

b. May 21 $5,250

7-27

Problem 7-31:

Solution:

$6,000 .70

= $8,571.43

7-28

Problem 7-35:

Solution:

$8,000 .96

= $8,333.33$20,000.00 - 8,333.33$11,666.67 balance outstanding