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After completing this chapter, students will be able to: 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,...
Discounts: Trade and Cash McGrawHill/Irwin Chapter Seven Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved Learning unit objectives LU 7-1: 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 Calculate chain discounts with the net price equivalent rate and single equivalent discount rate 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 72 Invoice 73 Trade Discount Amount & Net Price Formulas List price x Trade discount rate = Trade discount amount $5,678 x 25% = $1,419.50 List price Trade discount amount = Net Price $5,678 1,419.50 = $4,258.50 74 Freight Terms From Buyer FOB Shipping Prospective Point -buyer pays the freight cost FOB New Jersey -the buyer in San Diego pays the freight b u y e r s e ll e r From Seller Prospective FOB Destination -seller pays the freight cost FOB San Diego the - seller in New Jersey pays the freight 75 Complement Complement - The difference between the single discount rate and 100% The complement is what percentage the buyer will pay Complement 75% 25% For example, if the trade discount is 25%, the complement is 75% (100% 25%) Trade Discount 76 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 77 Calculating List Price When Net Price & Trade Discount Rate Are Known List Price = Net Price Complement of trade discount rate Example: 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 78 Chain Discounts 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% - 20 - 15 100% - 10 80 x 85 x 90 = 612 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 79 Calculating Net Price with a Chain Discount The price of office equipment is $15,000 With a chain discount of 20/15/10, what is the net price? $15,000 $15,000 $12,000 $10,200 x 20 1,020 3,000 1,800 $3,000 $12,000 $10,200 x 15 x $1,800 $9,180 10 $1,020 710 Calculating Net Price Using Net Price Equivalent Rate 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 = $5,820 711 Calculating Trade Discount Amount Using Single Equivalent Discount Rate 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 = $5,820 712 Cash Discounts A cash discount is for prompt payment It is not taken on freight, returned goods, sales tax, or trade discounts Credit Period Mar Mar 31 Time period sellers give buyers to pay invoices Discount Period Mar Mar 10 Time period buyer has to take advantage of cash discount 713 Invoice 714 Ordinary Dating Method 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 = $392 715 Receipt of Goods (ROG) 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 20 716 End of Month (EOM) 1/10 EOM 1% discount, up until the 10th of the following month Example: $600 invoice dated July 6; terms 1/10 EOM; paid on August 10 $600 x 01 = $6 $600 $6 = $594 or $600 x 99 = $594 717 End of Month (EOM) 2/10 EOM – Considered the “25th rule;” skip a month Example: $800 invoice dated April 29; terms 2/10 EOM; paid on June 18 No discount; $800 paid 718 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? 100% 2% = 98 $80 98 = $81.63 (1 02) Step Find the complement of discount rate partial payment by the Step Divide complement (amount credited) Step Subtract Step from the amount owed (outstanding balance) $400 $81.63 = $318.37 719 ... objectives LU 7-1 : 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... when net price and trade discount rate are known Calculate chain discounts with the net price equivalent rate and single equivalent discount rate LU 7-2 : Cash Discounts, Credit Terms, and Partial... Partial Payments List and explain typical discount periods and credit periods that a business may offer Calculate outstanding balance for partial payments 72 Invoice 73 Trade Discount Amount