1. Chapter Seven DISCOUNTS: TRADE AND CASH Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 7-2 LU 7-1: Trade Discounts—Single and Chain (Includes Discussion of Freight) 1. 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. LU 7-2: Cash Discounts, Credit Terms, and Partial Payments 1. List and explain typical discount periods and credit periods that a business may offer. 2. Calculate outstanding balance for partial payments. LEARNING UNIT OBJECTIVES

3. 7-3 INVOICE

4. 7-4 TRADE DISCOUNT AMOUNT & NET PRICE FORMULAS List price x Trade discount rate = Trade discount amount List price -- Trade discount amount = Net Price $5,678 -- 1,419.50 = $4,258.50 $5,678 x 25% = $1,419.50

5. 7-5 FREIGHT TERMS FOB Shipping Point - FOB Destination - FOB San Diego - buyerbuyer sellerseller From Buyer Prospective From Seller Prospective buyer pays the freight cost the buyer in San Diego pays the freight seller pays the freight cost the seller in New Jersey pays the freight FOB New Jersey -

6. 7-6 COMPLEMENT Complement - The difference between the single discount rate and 100%. The complement is what percentage the buyer will pay. For example, if the trade discount is 25%, the complement is 75% (100% -- 25%). 75% Trade Discount Complement 25%

7. 7-7 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

8. 7-8 CALCULATING LIST PRICE WHEN NET PRICE & TRADE DISCOUNT RATE ARE KNOWN List Price = Net Price. Complement of trade discount rate 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 Example:

9. 7-9 Warning: Do not just add up the discounts to calculate the discount! 20 + 15 + 10 = 45%.20 x.15 x.10 =.388 net trade 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% 100% - 20 - 15 - 10.80 x.85 x.90 =.612 net price %

10. 7-10 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.20 $3,000 $15,000 -- 3,000 $12,000 x.15 $1,800 $12,000 -- 1,800 $10,200 x.10 $1,020 $10,200 -- 1,020 $9,180

11. 7-11 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: $15,000 -- $9,180 = $5,820

12. 7-12 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: 1.00 --.612 =.388 Trade discount amount: $15,000 x.388 = $5,820

13. 7-13 CASH DISCOUNTS Credit Period Time period sellers give buyers to pay invoices. Mar. 1 Mar. 31 Time period buyer has to take advantage of cash discount. Mar. 1Mar. 10 Discount Period A cash discount is for prompt payment. It is not taken on freight, returned goods, sales tax, or trade discounts.

14. 7-14 INVOICE

15. 7-15 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 $400 -- $8 = $392 paid or $400 x.98 = $392

16. 7-16 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.

17. 7-17 END OF MONTH (EOM) 1/10 EOM -- 1% discount, up until the 10th of the following month. $600 x.01 = $6 $600 -- $6 = $594 or $600 x.99 = $594 Example: $600 invoice dated July 6; terms 1/10 EOM; paid on August 10.

18. 7-18 END OF MONTH (EOM) 2/10 EOM – Considered the “25th rule;” skip a month No discount; $800 paid. Example: $800 invoice dated April 29; terms 2/10 EOM; paid on June 18.

19. 7-19 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 = $318.37 $80.98 = $81.63 Step 1. Find the complement of discount rate. (1 --.02) Step 2. Divide partial payment by the complement (amount credited). Step 3. Subtract Step 2 from the amount owed (outstanding balance).