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Chapter 7 - Discounts: Trade and cash. In this chapter, the learning objectives are: 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.
Chapter 7 Discounts: Trade and Cash McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #7 Discounts: Trade and Cash Learning Unit Objectives LU7.1 Trade Discounts—Single and Chain (Includes Discussion of Freight) 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 72 Calculate chain discounts with the net price #7 Discounts: Trade and Cash Learning Unit Objectives LU7.2 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 73 Invoice Irwin/ McGraw-Hill Publishing C 1333 Burr Ridge Parkway Burr Ridge, Illinois 60527 Invoice No 5582 Date: Ship: Terms: July 8, 2010 Two-day UPS 2/10, n/30 Sold to: North Shore Community College Bookstore Ferncroft Road Danvers, MA 01923 Description Unit list price 50 Financial Management – Block/Hirt $ 95.66 10 Introduction to Business- Nichols $ 89.50 Total List Price Less: Trade Discount 25% Net Price Plus: Prepaid Shipping Charge Total Invoice Amount 74 Total 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 $5,678 x 25% = $1,419.50 Net Price = List price Trade discount amount $5,678 1,419.50 = $4,258.50 75 Freight Terms FOB Shipping Point buyer pays the freight cost FOB New Jersey The buyer in San Diego pays the freight b u y e r s e l l e r FOB Destination seller pays the freight cost FOB San Diego The seller in New Jersey pays the freight 76 Complement Complement The difference between the single discount rate and 100% Complement 75% 25% Trade Discount 77 If the trade discount is 25%, the complement is 75% (100%25%) 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 78 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 79 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 = .612 710 Calculating Net Price with a Chain Discount The price of a office equipment is $15,000. With a chain discount of $15,000 20/15/10, what is the net x .20 price? $3,000 711 $15,000 $12,000 $10,200 3,000 1,800 1,020 $12,000 $10,200 $9,180 x .15 x .10 $1,800 $1,020 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 = $5,820 712 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 = $5,820 713 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 714 Invoice New Hampshire Propane Company Date Description Qty Price Total Previous Balance $0.00 6/24/10 PROPANE 3.6 $3.40 $12.24 Invoice No 004433L Total this invoice: $12.24 Invoice Date 6/26/10 AMOUNT DUE: $12.24 Prompt Pay Discount: $0.19 Net Amount Due if RECEIVED by 7/10/10: $12.05 Due Date 715 7/26/10 Ordinary Dating Method 2/10, n/30 “two ten, net thirty” $400 x.02 = $8 $400 invoice dated July 5; terms 2/10, n/30; paid on July 11. $400 $8 = $392 or $400 x .98 = $392 Discount Period 10 Days July No Discount Day 11 30 July 15 Credit Period (30 days) 716 Aug Receipt of Goods (ROG) 3/10, n/30 ROG Cash discount period begins when the buyer receives the goods $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid on July 20. Invoice Date May Discount Period 10 Days July Missed discount period No Discount Day 11 30 July 18 Aug. 7 Credit Period (30 days) 717 Paid 900 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 Invoice Date July Discount Period ends on 10th Aug. No Discount 11th 30th Aug. 10 Credit Period 718 $600 x .99 = $594 Aug. 30 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 Invoice Date April 29 719 Discount Period ends on 10th June No Discount 10th 30th June 10 Credit Period June 30 Partial Payment • 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 (1.02) 2. Divide partial payment by the complement (amount credited) $400 $81.63 = $318.37 720 3. Subtract step 2 from the amount owed (outstanding balance) ... Introduction to Business- Nichols $ 89.50 Total List Price Less: Trade Discount 25% Net Price Plus: Prepaid Shipping Charge Total Invoice Amount 7 4 Total Amount $ $ $ $ 4 ,78 3.00 895.00 5, 678 .00 1,419.50... FOB San Diego The seller in New Jersey pays the freight 7 6 Complement Complement The difference between the single discount rate and 100% Complement 75 % 25% Trade Discount 7 7 If the trade discount is 25%, the complement is 75 % (100%25%)... and credit periods that a business may offer Calculate outstanding balance for partial payments 7 3 Invoice Irwin/ McGraw-Hill Publishing C 1333 Burr Ridge Parkway Burr Ridge, Illinois 605 27 Invoice No