1. Discounts: Trade and Cash
Chapter Eleven
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning unit objectives
LU 11-1: Trade Discounts—Single and Chain (Includes Discussion of Freight)
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.
LU 11-2: 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.

3. Invoice

4. Trade Discount Amount & Net Price Formulas
Trade discount amount = List price x Trade discount rate
$1, = $7, x 25%
Net Price = List price -- Trade discount amount
$5, = $7, – $1,943.88
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5. Freight Terms From Buyer Prospective FOB Shipping Point - FOB Boston -
Change to Massachusetts!!
FOB Shipping Point -
FOB Boston -
buyer pays the freight cost
The buyer in San Diego pays the freight
buyer
seller
From Seller Prospective
FOB Destination -
FOB San Diego -
seller pays the freight cost
the seller in Boston pays the freight
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6. 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, $1,080 = $1,620
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7. Complement Complement 60% 40% Trade Discount
Complement - The difference between the single discount rate and 100%. The complement is what percentage the buyer will pay.
Complement
60%
40%
For example, if the trade discount is 40%, the complement is 60% (100% -- 40%).
Trade
Discount
Using Complement:
$2,700 x .60 = $1,620
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8. Calculating List Price When Net Price & Trade Discount Rate Are Known
List Price = Net Price
Complement of trade discount rate
Example:
A Macintosh computer has a $1,620 net price and a 40% trade discount. What is the list price?
100% -- 40% = 60%
$1,620
.60
= $2,700 list price
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9. Calculating Net Price with a Chain Discount
The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?
$15,000 x
$ 3,000
$15,000
-- 3,000
$12,000 x
$1,800
$12,000
-- 1,800
$10,200 x
$1,020
$10,200
-- 1,020
$9,180
Net Price
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10. Warning: Do not just add up the discounts to calculate the discount!
Chain Discounts
Chain discounts are trade discounts in a series of two or more successive discounts. For example: 20/15/10.
To find the net price equivalent rate, multiply the complements:
100% 100% %
.80 x x = .612 net price %
Warning: Do not just add up the discounts to calculate the discount!
= %
.20 x .15 x .10 = .388 net trade discount
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11. Calculating Net Price Using Net Price Equivalent Rate
The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?
Find the net price equivalent rate by multiplying the complements:
.80 x .85 x .90 = .612
To find the net price, multiply the net price equivalent rate by the list price:
$15,000 x .612 = $9,180
Trade discount amount:
$15, $9,180 = $5,820
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12. Calculating Trade Discount Amount Using Single Equivalent Discount Rate
The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?
Find the net price equivalent rate by multiplying the complements:
.80 x .85 x .90 = .612
To find the single equivalent discount rate, subtract the net price equivalent rate from 1:
= .388
Trade discount amount:
$15,000 x .388 = $5,820
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13. CALCULATING TRADE DISCOUNT TO MATCH A COMPETITOR’S PRICE
EXAMPLE Suppose you are the marketing manager for a car radio distributor. If you currently offer a 15% trade discount for a radio with a list price of $225, what additional trade discount must you offer to match a competitor’s net price of $145?
Step 1. Trade discount x List price = Net price
Complement of 15% trade discount: 100% - 15% = 85%, or .85
(.85 x D) x $225 = $145
(.85 x $225)D = $145
(regroup)
Step % - 76% = 24%
$191.25D = $145
$191.25D
$191.25 =
$145
15/24 chain discount
D = .76, or 76%
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14. Invoice
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15. Cash Discounts
A cash discount is for prompt payment. It is not taken on freight, returned goods, sales tax, or trade discounts.
Credit Period
Mar. 1
Mar. 31
Time period sellers give buyers to pay invoices.
Discount Period
Mar. 1
Mar. 10
Time period buyer has to take advantage of cash discount.
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16. Ordinary Dating Method
2/10, n/30 is read: “two ten, net thirty”
Example: $400 invoice dated July 5; terms 2/10, n/30; paid on July 11.
$400 x.02 = $8 cash discount
$ $8 = $392 paid or
$400 x .98 = $392
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17. Receipt of Goods (ROG)
3/10, n/30 ROG - Cash discount period begins when the buyer receives the goods.
Example: $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid on July 20.
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18. End of Month (EOM)
1/10 EOM -- 1% discount, up until the 10th of the following month.
Example: $600 invoice dated July 6; no freight or returns; terms 1/10 EOM; paid on August 8.
$600 x .01 = $6
$ $6 = $594 or
$600 x .99 = $594
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19. End of Month (EOM) 2/10 EOM – Considered the “25th rule;” skip a month
Example: $800 invoice dated April 29; no freight or returns; terms 2/10 EOM; paid on June 18.
No discount; $800 paid.
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20. Solving a Word Problem with Trade and Cash Discount
The Word Problem Hardy Company sent Regan Corporation an invoice for office equipment with a $10,000 list price. Hardy dated the invoice July 29 with terms of 2/10 EOM (end of month). Regan receives a 30% trade discount and paid the invoice on September 6. Since terms were FOB destination, Regan paid no freight charge. What was the cost of office equipment for Regan?
1. Calculate the net price. $10,000 x .70 = $7,000
100%
- 30% (trade discount)
2. Calculate the discount period. Sale: 7/29 Month 1: Aug. Month 2: Sept 10 Paid on Sept. 6—is entitled to 2% off.
If you save 2 cents on a dollar, you are spending 98 cents.
3. Calculate the cost of office equipment
$7,000 x .98 = $6,860
100% - 2%
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21. 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
Step 1. Find the complement of discount
rate.
$80
.98 = $81.63
Step 2. Divide partial payment by the
complement (amount credited).
(amount credited)
( )
Step 3. Subtract Step 2 from the
total owed (outstanding
balance).
$ $81.63 = $318.37
(outstanding balance)
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