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McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved Chapter 7 Discounts: Trade and Cash.

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Presentation on theme: "McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved Chapter 7 Discounts: Trade and Cash."— Presentation transcript:

1 McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved Chapter 7 Discounts: Trade and Cash

2 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 Learning Unit Objectives Trade Discounts—Single and Chain (Includes Discussion of Freight) LU7.1

3 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 Learning Unit Objectives Cash Discounts, Credit Terms, and Partial Payments LU7.2

4 7-4 Irwin/ McGraw-Hill Publishing C.Invoice No Burr Ridge Parkway Burr Ridge, Illinois 60527Date:July 8, 2010 Ship: Two-day UPS Terms:2/10, n/30 Sold to: North Shore Community College Bookstore 1 Ferncroft Road Danvers, MA DescriptionUnit list priceTotal Amount 50 Financial Management – Block/Hirt $ $ 4, Introduction to Business- Nichols $ Total List Price $ 5, Less: Trade Discount 25% 1, Net Price $ 4, Plus: Prepaid Shipping Charge Total Invoice Amount $ 4, Invoice

5 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, , = $4, $5,678 x 25% = $1,419.50

6 7-6 Freight Terms FOB Shipping Point - buyer pays the freight cost FOB New Jersey - The buyer in San Diego pays the freight FOB Destination - seller pays the freight cost FOB San Diego - The seller in New Jersey pays the freight buyerbuyer sellerseller

7 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% Trade Discount Complement 25%

8 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

9 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, LP = $2,700

10 7-10 Chain Discounts Two or more discounts: 20/15/10 To calculate discount = 45% Find the net price equivalent rate (multiply the complements) 100% 100% 100% x.85 x.90 =.612

11 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 $12,000$10,200 x.20 -3, , ,020 $3,000$12,000$10,200 $9,180 x.15 x.10 $1,800 $1,020

12 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

13 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 = =.388 Trade Discount Amount $15,000 x.388 = $5,820

14 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. 1Mar. 10 Discount Period Discount for prompt payment. Not taken on freight, returned goods, sales tax, & trade discounts.

15 7-15 Invoice New Hampshire Propane Company Date DescriptionQty.PriceTotal Previous Balance $0.00 6/24/10 PROPANE3.6$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 L Invoice Date 6/26/10

16 7-16 Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” July 5 July 15 Aug. 4 Discount Period 10 Days No Discount Day 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

17 7-17 Receipt of Goods (ROG) 3/10, n/30 ROG - Cash discount period begins when 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 Discount Day Discount Period 10 Days

18 7-18 End of Month (EOM) 1/10 EOM - 1% discount, up until the 10th of the following month July 6 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 Discount 11th - 30th Discount Period ends on 10th

19 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 Period ends on 10th No Discount 10th - 30th

20 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 = $ $80.98 = $ 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)


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