Chapter ElevenDISCOUNTS: TRADE

AND CASH

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LEARNING UNIT OBJECTIVES

LU 11-1: 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 11-2: Cash Discounts, Credit Terms, and Partial Payments

5. List and explain typical discount periods and credit periods that a business may off er.

6. Calculate outstanding balance for partial payments.

11-2

INVOICE

11-3

TRADE DISCOUNT AMOUNT & NET PRICE FORMULAS

11-4

Trade discount amount = List price x Trade discount rate

Net Price = List price -- Trade discount amount

$5,831.62 = $7,775.50 – $1,943.88

$1,943.88 = $7,775.50 x 25%

FREIGHT TERMS

11-5

FOB Shipping Point - FOB Boston -

FOB Destination -FOB San Diego -

bu

ye

r

seller

From Buyer Prospective

From Seller Prospective

buyer pays the freight costThe buyer in San Diego pays the

freight

seller pays the freight costthe seller in Boston pays the freight

Change to Massachusetts!!

SINGLE TRADE DISCOUNT

11-6

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

COMPLEMENT

11-7

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 40%, the complement is 60% (100% -- 40%).

60%

TradeDiscount

Complement

40%

Using Complement:

$2,700 x .60 = $1,620

CALCULATING LIST PRICE WHEN NET PRICE & TRADE DISCOUNT RATE ARE

KNOWN

11-8

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:

CALCULATING NET PRICE WITH A CHAIN DISCOUNT

11-9

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

Net Price

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

11-10

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 %

CALCULATING NET PRICE USING NET PRICE EQUIVALENT RATE

11-11

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

CALCULATING TRADE DISCOUNT AMOUNT USING SINGLE EQUIVALENT

DISCOUNT RATE

11-12

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

CALCULATING TRADE DISCOUNT TO MATCH A COMPETITOR’S

PRICEEXAMPLE 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

$191.25D = $145

(regroup)

$191.25D$191.25

=$145$191.25

D = .76, or 76%

Step 2. 100% - 76% = 24%

15/24 chain discount

11-13

INVOICE

11-14

CASH DISCOUNTS

11-15

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. 1 Mar. 10

Discount Period

A cash discount is for prompt payment. It is not taken on freight, returned goods, sales tax, or trade discounts.

ORDINARY DATING METHOD

11-16

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

RECEIPT OF GOODS (ROG)

11-17

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.

END OF MONTH (EOM)

11-18

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; no freight or returns; terms 1/10 EOM; paid on August 8.

END OF MONTH (EOM)

11-19

2/10 EOM – Considered the “25th rule;” skip a month

No discount; $800 paid.

Example: $800 invoice dated April 29; no freight or returns; terms 2/10 EOM; paid on June 18.

SOLVING A WORD PROBLEM WITH TRADE AND CASH

DISCOUNTThe 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?

11-20

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.

3. Calculate the cost of office equipment

$7,000 x .98 = $6,860

If you save 2 cents on a dollar, you are spending 98 cents.

100% - 2%

PARTIAL PAYMENT

11-21

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

total owed (outstanding balance).

(amount credited)

(outstanding balance)