7 1 Chapter 7 Discounts Trade and Cash

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Chapter 7 Discounts: Trade and Cash 7 -2 Mc. Graw-Hill/Irwin Copyright © 2006 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

#7 Discounts: Trade and Cash Learning Unit Objectives LU 7. 1 Trade Discounts -- Single and Chain 7 -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

#7 Discounts: Trade and Cash Learning Unit Objectives LU 7. 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 7 -4

Invoice Irwin/ Mc. Graw-Hill Publishing C. 1333 Burr Ridge Parkway Burr Ridge, Illinois 60521 Invoice No. 5582 Date: Ship: Terms: July 8, 2006 Two-day UPS 2/10, n/30 Sold to: North Shore Community College Bookstore 1 Ferncroft Road Danvers, MA 01923 Description Unit list price Total Amount 50 Managerial Accounting - Jones 10 Marketing - Mc. Carthy 7 -5 $ 95. 66 $ 89. 50 Total List Price Less: Trade Discount 25% Net Price Plus: Prepaid Shipping Charge Total Invoice Amount $ $ 4, 783. 00 895. 00 5, 678. 00 1, 419. 50 4, 258. 50 125. 00 4, 383. 50

Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate Net Price = List price - Trade discount amount 7 -6

Freight Terms FOB Shipping Point - buyer pays the freight cost FOB California - 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 New Jersey - The seller in CA pays the freight 7 -7

Complement - The difference between the discount rate and 100% Complement 75% 25% Trade Discount 7 -8 If the trade discount is 25%, the complement is 75% (100%-25%)

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 7 -9

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, 100. 70 LP = $3, 000 7 -10

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) 100% -15 -10 -5 . 85 x. 90 x. 95 =. 72675 7 -11

Calculating Net Price Using Net Price Equivalent Rate 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. 95 =. 684 $20, 000 x. 684 = $13, 680 Trade Discount Amount $20, 000 - $13, 680 = $6, 320 7 -12

Calculating Trade Discount Amount Using Single Equivalent Discount Rate 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. 95 =. 684 Single equivalent rate 1. 00 -. 684 -. 316 $20, 000 x. 316 = $6, 320 7 -13

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 7 -14

Invoice New Hampshire Propane Company Date Description Qty. Price Total 3. 6 $3. 22 $12. 24 Previous Balance 6/24/05 PROPANE Invoice No. 004433 L Invoice Date 6/26/05 Total this invoice: $12. 24 AMOUNT DUE: $12. 24 Prompt Pay Discount: $0. 19 Net Amount Due if RECEIVED by 7/10/05: $12. 05 Due Date 7 -15 7/26/05

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 Mar. May July Jan. Apr. June Feb. Aug. Oct. Dec. Nov. Sept. Knuckles Months 31 days: Jan. , March, May, July, Aug. , Oct. , Dec. 7 -16

Table 7. 1 - Exact-days-in-a-year calendar 7 -17

Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” $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 Discount Period 10 Days May 3 No Discount Day 11 - 30 May 13 Credit Period (30 days) 7 -18 June 2

Receipt of Goods (ROG) 1/10, n/60 ROG - Cash discount period begins when the buyer receives the goods $1, 000 x. 01 = $10 $1, 000 invoice dated May 5, received goods June 7; terms 1/10, n/60 ROG; paid on June 17. $1, 000 - $10 = $990 or $1, 000 x. 99 = $990 Invoice Date May 5 Discount Period 10 Days June 7 No Discount Day 11 - 60 June 17 Aug. 6 Credit Period (60 days) 7 -19

End of Month (EOM) 2/10 EOM - 2% discount, up until the 10 th of the following month $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 Invoice Date Sept. 3 Discount Period ends on 10 th Oct 1 No Discount 11 th - 30 th Oct. 10 Credit Period 7 -20 Oct. 30

End of Month (EOM) 2/10 EOM - Consider the “ 25 th rule” - Skip a month $400 invoice dated Sept. 28; terms 2/10 EOM; paid on November 8. $400 x. 02 = $8 $400 - $8 = $392 or $400 x. 98 = $392 Invoice Date Sept. 28 7 -21 Discount Period ends on 10 th No. v 1 No Discount 10 th - 30 th Nov. 10 Credit Period Nov. 30

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? 1. Find the complement of discount rate 100% - 3% =. 97 $100. 97 = $103. 09 2. Divide partial payment by the complement $400 - $103. 09 = $296. 91 7 -22 3. Subtract step 2 from the amount owed