7 1 7 Discounts Trade and Cash Learning

7 -1 #7 Discounts: Trade and Cash Learning Unit Objectives LU 7. 1 Trade Discounts -- Single and Chain l Calculate single trade discounts with formulas and complements 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 l l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -2 #7 Discounts: Trade and Cash Learning Unit Objectives LU 7. 2 Cash Discounts, Credit Terms, and Partial Payments l Explain the freight terms FOB shipping point and FOB destination and their effect on cash discounts List and explain typical discount periods and credit periods that a business may offer Calculate outstanding balance for partial payments l l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -3 Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate Net Price = List price - Trade discount amount Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -4 Complement - The difference between the discount rate and 100% 60% If the trade discount is 40%, the complement is 60% (100%-40%) 40% Trade Discount Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -5 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 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -6 Calculating List Price When Net Price and Trade Discount Rate Are Known List Price = Net Price. Complement of trade discount rate The price of office equipment has a $2, 100 net price and a 30% trade discount. What is the list price? Irwin/Mc. Graw-Hill 100% - 30% = 70% $2, 100. 70 NP = $3, 000 © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -7 Chain Discounts Two or more discounts: 15/10/5 To calculate discount 15 + 10 + 5 = 30% Find the net price equivalent rate (multiply the complements). 85 x. 90 x. 95 =. 72675 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -8 Chain Discounts The price of a office furniture is $20, 000. The chain discount is 20/10/5 what is the net price? Find the net price equivalent rate (multiply the complements). 80 x. 95 =. 684 $20, 000 x. 684 = $13, 680 Trade Discount Amount $20, 000 - $13, 680 = $6, 320 or find single equivalent rate 1. 00 -. 684 -. 316 $20, 000 x. 316 = $6, 320 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -9 Freight Terms FOB Shipping Point - buyer pays the freight cost FOB New Jersey - The buyer in NJ pays the freight s e l l e r b u y e r FOB Destination - seller pays the freight cost FOB California - The seller in CA pays the freight Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -10 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. 10 Time period buyer has to take advantage of cash discount Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -11 Table 7. 1 - Exact-days-in-a-year calendar Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -12 Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” $500 x. 02 = $10 $500 invoice dated May 3; terms 2/10, n/30; paid on May 10. $500 - $10 = $490 or $500 x. 98 = $490 Discount Period May 3 Irwin/Mc. Graw-Hill No Discount May 13 Credit Period April 2 © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -13 Receipt of Goods (ROG) 1/10, n/30 ROG - Cash discount period begins when the buyer receives the goods $1, 000 invoice dated May 5, received goods June 7; terms 1/10, n/30 ROG; paid on June 17. $1, 000 x. 01 = $10 $1, 000 - $10 = $990 or $1, 000 x. 99 = $990 Invoice Date May 5 Irwin/Mc. Graw-Hill Discount Period June 7 No Discount June 17 Credit Period Aug. 6 © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -14 End of Month (EOM) 2/10 EOM - Consider the “ 25 th rule” $400 invoice dated Sept. 3; terms 2/10 EOM; paid on October 8. $400 x. 02 = $8 $400 - $8 = $392 or $400 x. 98 = $392 Discount Period Invoice Date Sept. 3 Irwin/Mc. Graw-Hill Oct 1 No Discount Oct. 10 Credit Period Oct. 30 © 2000 The Mc. Graw-Hill Companies, Inc. ,

7 -15 Partial Payment l 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 $100. 97 = $103. 09 $400 - $103. 09 = $296. 91 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc. ,