Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 1

2 Chapter 9 Discounts: Trade and Cash Prepared by Dr. Elena Skliarenko

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 3 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 #9 Learning Unit Objectives Trade Discounts -- Single and Chain LU9.1

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 4 List and explain typical discount periods and credit periods that a business may offer Calculate outstanding balance for partial payments Discounts: Trade and Cash #9 Learning Unit Objectives Cash Discounts, Credit Terms, and Partial Payments LU9.2

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 5 THE DISTRIBUTION CHAIN Manufacturer Distributor Wholesaler Retailer Final Customer

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 6 Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate Net Price = List price - Trade discount amount

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 7 Freight Terms FOB Shipping Point - buyer pays the freight cost FOB Quebec - The buyer in Ontario pays the freight FOB Destination - seller pays the freight cost FOB Toronto - The seller in Montreal pays the freight buyerbuyer sellerseller

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 8 Complement Complement - The difference between the discount rate and 100% If the trade discount is 25%, the complement is 75% (100%-25%) 75% Trade Discount Complement 25%

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 9 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

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 10 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, LP = $3,000

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 11 To find amount of trade discount D t, when list price and discount rate are given use formula 9.1 D t = L ·d (9.1) Substitute the known values and get the amount of D t. D t = 2,700 · 0.4 = $1,080 To find the net price when the list price, amount of discount and discount rate are given, use one of the two formulas: 9.2 or 9.3 N = L - D t (9.2) or N = L ( 1-d)(9.3) Short Cut Formulas

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 12 Chain Discounts Two or more discounts: 15/10/5 To calculate discount = 30% Find the net price equivalent rate (multiply the complements) 100% 100% 100% x.90 x.95 =.72675

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 13 Chain Discounts The price of 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 $20,000 x.316 = $6,320

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 14 There is a quicker way to calculate the net price after multiple discounts. For this purpose we can use formula 9.3 with (1-d) factor for each of the discounts. N = L (1-d 1 ) (1-d 2 ) (1-d 3 )(9.5) Short Cut Formulas

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 15 Short Cut formulas There is a shortcut way to find single equivalent discount rate. For this purpose use formula 9.6: d e = 1- (1-d 1 ) (1-d 2 ) (1-d 3 ),(9.6) where d e is a single equivalent to discount rate. To find amount of the trade discount with series discounts we can use formula 9.7 D t = L · d e (9.7)

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 16 Cash Discounts Credit Period Time period sellers give buyers to pay invoices Mar. 1Mar. 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.

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 17 Exact-days-in-a-year calendar

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 18 Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” May 3 May 13June2 Discount Period 10 Days No Discount Day 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

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 19 Receipt of Goods (ROG) 1/10, n/30 ROG - Cash discount period begins when the buyer receives the goods May 5 June 7 Aug. 6 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 Discount Day Discount Period 10 Days

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 20 End of Month (EOM) 2/10 EOM - 2% discount, up until the 10th of the following month Sept.3 Oct 1Oct. 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 Discount Day Discount Period 10 Days

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 21 End of Month (EOM) 2/10 EOM - Consider the “25th rule” - Skip a month Sept.28 No.v 1Nov. 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 Period 10 Days No Discount Day

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 22 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 - $ = $ $ = $ Find the complement of discount rate 2. Divide partial payment by the complement 3. Subtract step 2 from the amount owed

Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. 23 Amounts credited (Cr) to customer’s account will be bigger than the amounts paid and may be calculated by formula 9.8: Amount Credited = Amount Paid (9.8) (1-d) Amounts paid within the discount period will be smaller than amounts credited to the customer’s account and can be calculated by formula 9.9: P = Cr · (1-d)(9.9) Outstanding balance is the difference between the balance at the beginning of the transaction B i and the amount credited. B o = B i – Cr(9.10) Short Cut Formulas