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1-2 Chapter 7 Discounts: Trade and Cash McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

1-3 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 #7 Learning Unit Objectives Trade Discounts -- Single and Chain LU7.1

1-4 List and explain typical discount periods and credit periods that a business may offer Calculate outstanding balance for partial payments Discounts: Trade and Cash #7 Learning Unit Objectives Cash Discounts, Credit Terms, and Partial Payments LU7.2

1-5 Irwin/ McGraw-Hill Publishing C.Invoice No Burr Ridge Parkway Burr Ridge, Illinois 60521Date:July 8, 2001 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 Managerial Accounting - Jones $ $ 2, Marketing - McCarthy $ Total List Price $ 3, Less: Trade Discount 25% Net Price $ 2, Plus: Prepaid Shipping Charge Total Invoice Amount $ 2, Invoice

1-6 Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate Net Price = List price - Trade discount amount

1-7 Freight Terms FOB Shipping Point - buyer pays the freight cost FOB California - The buyer in NJ pays the freight FOB Destination - seller pays the freight cost FOB New Jersey - The seller in CA pays the freight buyerbuyer sellerseller

1-8 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%

1-9 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

1-10 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

1-11 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

1-12 Chain Discounts The price of a 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

1-13 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.

1-14 Table Exact-days-in-a-year calendar

1-15 Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” May 3 May 13 June 2 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

1-16 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

1-17 End of Month (EOM) 2/10 EOM - 2% discount, up until the 10th of the following month Sept. 3 Oct 1 Oct. 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

1-18 End of Month (EOM) 2/10 EOM - Consider the “25th rule” - Skip a month Sept. 28 No.v 1 Nov. 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

1-19 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