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

Learning Unit Objectives #7 Discounts: Trade and Cash Learning Unit Objectives Trade Discounts—Single and Chain (Includes Discussion of Freight) LU7.1 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

Learning Unit Objectives #7 Discounts: Trade and Cash Learning Unit Objectives LU7.2 Cash Discounts, Credit Terms, and Partial Payments List and explain typical discount periods and credit periods that a business may offer Calculate outstanding balance for partial payments

Invoice Irwin/ McGraw-Hill Publishing C. Invoice No. 5582 1333 Burr Ridge Parkway Burr Ridge, Illinois 60527 Date: July 8, 2010 Ship: Two-day UPS Terms: 2/10, n/30 Sold to: North Shore Community College Bookstore 1 Ferncroft Road Danvers, 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

Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate $5,678 x 25% = $1,419.50 Net Price = List price - Trade discount amount $5,678 - 1,419.50 = $4,258.50

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

Complement Complement - The difference between the single discount rate and 100% Complement 75% 25% If the trade discount is 25%, the complement is 75% (100%-25%) Trade Discount

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

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

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

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 -3,000 - 1,800 - 1,020 $3,000 $9,180 x .15 x .10 $1,800 $1,020

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

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

Cash Discounts Discount for prompt payment. Not taken on freight, returned goods, sales tax, & trade discounts. Credit Period Mar. 1 Mar. 31 Time period sellers gives buyers to pay invoices Discount Period Mar. 1 Mar. 10 Time period buyer has to take advantage of cash discount

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 Date 6/26/10

Aids in Calculating Credit Due Dates Days-in-a-Month Rule Thirty 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

Table 7.1 - Exact-days-in-a-year calendar

Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” $400 x.02 = $8 $400 - $8 = $392 or $400 x .98 = $392 $400 invoice dated July 5; terms 2/10, n/30; paid on July 11. Discount Period 10 Days No Discount Day 11 - 30 July 5 July 15 Aug. 4 Credit Period (30 days)

Receipt of Goods (ROG) 3/10, n/30 ROG - Cash discount period begins when the buyer receives the goods Paid 900 Missed discount period $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid on July 20. Invoice Date Discount Period 10 Days No Discount Day 11 - 30 May 9 July 8 July 18 Aug. 7 Credit Period (30 days)

End of Month (EOM) 1/10 EOM - 1% discount, up until the 10th of the following month $600 invoice dated July 6; terms 1/10 EOM; paid on August 10. $600 x .01 = $6 $600 - $6 = $594 or $600 x .99 = $594 Discount Period ends on 10th Invoice Date No Discount 11th - 30th July6 Aug. 1 Aug. 10 Aug. 30 Credit Period

End of Month (EOM) 2/10 EOM - Consider the “25th rule” - Skip a month $800 invoice dated April 29; terms 2/10 EOM; paid on June 18. Paid $800 Missed discount period Discount Period ends on 10th Invoice Date No Discount 10th - 30th April 29 June 1 June 10 June 30 Credit Period

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? 1. Find the complement of discount rate 100% - 2% = .98 $80 .98 = $81.63 2. Divide partial payment by the complement (amount credited) (1-.02) 3. Subtract step 2 from the amount owed (outstanding balance) $400 - $81.63 = $318.37

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

Problem 7-25: Solution: Net price .95 x .98 x .99 = .92169 x $625 = $576.05625 = $576.06 Net price .07831 x $625 = $48.94 Trade discount

Problem 7-26: Solution: Manufacturer A 1.0000 - .6873 .3127 = 31.27% - .6873 .3127 = 31.27% .79 x .87 = Manufacturer A 1.0000 - .6808 .3192 = 31.92% .74 x .92 = Manufacturer B

Problem 7-27: Solution: a. $5,250 - $250 = $5,000 x .97 = $4,850 + 250 freight $5,100 b. May 21 $5,250

Problem 7-31: Solution: $6,000 .70 = $8,571.43

Problem 7-35: Solution: $20,000.00 - 8,333.33 $8,000 $11,666.67 balance outstanding $8,000 .96 = $8,333.33