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Chapter 7. Discounts: Trade and Cash. #7. Discounts: Trade and Cash. Learning Unit Objectives. Trade Discounts—Single and Chain (Includes Discussion of Freight). LU7.1. Calculate single trade discounts with formulas and complements

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Chapter 7 l.jpg

Chapter 7

Discounts: Trade and Cash


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#7

Discounts: Trade and Cash

Learning Unit Objectives

Trade Discounts—Single and Chain (Includes Discussion of Freight)

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


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#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


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Invoice

Irwin/ McGraw-Hill Publishing C. Invoice No. 5582

1333 Burr Ridge Parkway

Burr Ridge, Illinois 60527 Date: July 8, 2010 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 Financial Management – Block/Hirt $ 95.66 $ 4,783.00

10 Introduction to Business- Nichols $ 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


Trade discount amount net price formulas l.jpg
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


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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


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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


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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


Calculating list price when net price and trade discount rate are known l.jpg
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


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Chain Discounts Rate Are Known

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


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Calculating Net Price with a Chain Discount Rate Are Known

The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?


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Calculating Net Price Using Net Price Rate Are KnownEquivalent 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


Calculating trade discount amount using single equivalent discount rate l.jpg
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


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Cash Discounts Discount Rate

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


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Invoice Discount Rate

New Hampshire Propane Company

Date Description Qty. Price Total

Previous Balance $0.00

6/24/10 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 7/10/10: $12.05

Due Date 7/26/10

Invoice No.

004433L

Invoice Date

6/26/10


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Ordinary Dating Method Discount Rate

2/10, n/30 - “two ten, net thirty”

$400 x.02 = $8

$400 - $8 = $392

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)


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Receipt of Goods (ROG) Discount Rate

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)


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End of Month (EOM) Discount Rate

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


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End of Month (EOM) Discount Rate

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


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Partial Payment Discount Rate

  • 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?

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


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