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Chapter 7

Chapter 7. Discounts: Trade and Cash. #7. Discounts: Trade and Cash. Learning Unit Objectives. Trade Discounts -- Single and Chain. LU7.1. Calculate single trade discounts with formulas and complements Explain the freight terms FOB shipping point and FOB destination

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Chapter 7

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  1. Chapter 7 Discounts: Trade and Cash

  2. #7 Discounts: Trade and Cash Learning Unit Objectives Trade Discounts -- Single and Chain LU7.1 • Calculate single trade discounts with formulas and complements • Explain the freight terms FOB shipping pointand 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

  3. #7 Discounts: Trade and Cash Learning Unit Objectives Cash Discounts, Credit Terms, and Partial Payments LU7.2 • List and explain typical discount periods and credit periods that a business may offer • Calculate outstanding balance for partial payments

  4. Invoice Irwin/ McGraw-Hill Publishing C. Invoice No. 5582 1333 Burr Ridge Parkway Burr Ridge, Illinois 60521 Date: July 8, 2009 Ship: Two-day UPS Terms: 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 $ 95.66 $ 4,783.00 10 Marketing - McCarthy $ 89.50 895.00 Total List Price $ 5,678.00 Less: Trade Discount 25% 1,419.50 Net Price $ 4,258.50 Plus: Prepaid Shipping Charge 125.00 Total Invoice Amount $ 4,383.50

  5. Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate $5,678 x 25% = $1,419.50 Net Price = List price - Trade discount amount $5,678 - 1,419.50 = $4,258.50

  6. Freight Terms FOB Shipping Point - buyer pays the freight cost FOB New Jersey - The buyer in San Diego pays the freight buyer seller FOB Destination - seller pays the freight cost FOB San Diego - The seller in New Jersey pays the freight

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

  8. 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

  9. Calculating List Price When Net Price and Trade Discount Rate Are Known List Price = Net Price . Complement of trade discount rate Macintosh Computer has a $1,620 net price and a 40% trade discount. What is the list price? 100% - 40% = 60% $1,620 .60 LP = $2,700

  10. Chain Discounts Two or more discounts: 20/15/10 To calculate discount 20 + 15 + 10 = 45% Find the net price equivalent rate (multiply the complements) 100% 100% 100% -20 -15 - 10 .80 x .85 x .90 = .612

  11. Calculating Net Price with a Chain Discount The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?

  12. Calculating Net Price Using Net Price Equivalent Rate The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price? Find the net price equivalent rate (multiply the complements) .80 x .85 x .90 = .612 $15,000 x .612 = $9,180 Trade Discount Amount $15,000 - $9,180 = $5,820

  13. Calculating Trade Discount Amount Using Single Equivalent Discount Rate The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price? Find the net price equivalent rate (multiply the complements) .80 x .85 x .90 = .612 1.00 - .612 = .388 Trade Discount Amount $15,000 x .388 = $5,820

  14. 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. 1 Mar. 10 Time period buyer has to take advantage of cash discount

  15. Invoice New Hampshire Propane Company Date Description Qty. Price Total Previous Balance 6/24/08 PROPANE 3.6 $3.40 $12.24 Total this invoice: $12.24 AMOUNT DUE: $12.24 Prompt Pay Discount: $0.19 Net Amount Due if RECEIVED by 7/10/08: $12.05 Due Date 7/26/08 Invoice No. 004433L Invoice Date 6/26/08

  16. Aids in Calculating Credit Due Dates Oct. May Dec. Mar. July Aug. Jan. Apr. Nov. Sept. June Feb. Knuckles Months 31 days: Jan., March, May, July, Aug., Oct., Dec. 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

  17. Table 7.1 - Exact-days-in-a-year calendar

  18. Ordinary Dating Method 2/10, n/30 - “two ten, net thirty” $400 x.02 = $8 $400 - $8 = $4392 or $400 x .98 = $392 $400 invoice dated July 5; terms 2/10, n/30; paid on July 11. Discount Period 10 Days No Discount Day 11 - 30 July 5 July 15 Aug. 4 Credit Period (30 days)

  19. Receipt of Goods (ROG) 3/10, n/30 ROG - Cash discount period begins when the buyer receives the goods Paid 900 Missed discount period $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid on July 20. Invoice Date Discount Period 10 Days No Discount Day 11 - 30 May 9 July 18 July 8 Aug. 7 Credit Period (30 days)

  20. End of Month (EOM) 1/10 EOM - 1% discount, up until the 10th of the following month $600 invoice dated July 6; terms 1/10 EOM; paid on August 10. $600 x .01 = $6 $600 - $6 = $594 or $600 x .99 = $594 Discount Period ends on 10th Invoice Date No Discount 11th - 30th July6 Aug. 10 Aug. 1 Aug. 30 Credit Period

  21. End of Month (EOM) 2/10 EOM - Consider the “25th rule” - Skip a month $800 invoice dated April 29; terms 2/10 EOM; paid on June 18. Paid $800 Missed discount period Discount Period ends on 10th Invoice Date No Discount 10th - 30th April 29 June 10 June 1 June 30 Credit Period

  22. Partial Payment • Sara owes $400. Sara’s terms were 2/10, n/30. Within 10 days Sara sent in a payment of $80. How much is her new balance? 1. Find the complement of discount rate 100% - 2% = .98 $80 .98 = $81.63 2. Divide partial payment by the complement (amount credited) (1-.02) 3. Subtract step 2 from the amount owed (outstanding balance) $400 - $81.63 = $318.37

  23. Problem 7-23: Solution: • $26.95 x 50 = $1,347.50 list price • $1.347.50 (B) x .05 (R) = $67.375 (P) = $67.38 discount amount • $1,347.50 – 67.38 = $1,280.12 net price

  24. Problem 7-25: .95 x .98 x .99 = .92169 x $625 = $576.05625 = $576.06 Net price Trade discount .07831 x $625 = $48.94 Solution:

  25. Problem 7-26: Manufacturer A 1.0000 - .6873 .3127 = 31.27% .79 x .87 = Manufacturer B 1.0000 - .6808 .3192 = 31.92% .74 x .92 = Solution:

  26. Problem 7-27: Solution: a. $5,250 - $250 = $5,000 x .97 = $4,850 + 250 freight $5,100 b. May 21 $5,250

  27. Problem 7-31: $6,000 .70 = $8,571.43 Solution:

  28. Problem 7-35: $8,000 .96 = $8,333.33 Solution: $20,000.00 - 8,333.33 $11,666.67 balance outstanding

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