2. Discounts: Trade and Cash
Chapter 7
Discounts: Trade and Cash
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Discounts: Trade and Cash#7
Discounts: Trade and Cash
Learning Unit Objectives
LU7.1
Trade Discounts -- Single and Chain
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

4. Discounts: Trade and Cash#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

5. Invoice Irwin/ McGraw-Hill Publishing C. Invoice No. 5582
1333 Burr Ridge Parkway
Burr Ridge, Illinois Date: July 8, 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 $ $ ,783.00
10 Marketing - McCarthy $ Total List Price $ , Less: Trade Discount 25% , Net Price $ , Plus: Prepaid Shipping Charge Total Invoice Amount $ ,383.50

6. Trade Discount Amount & Net Price Formulas
Trade discount amount = List price x Trade discount rate
Net Price = List price - Trade discount amount

7. Freight Terms FOB Shipping Point - buyer pays the freight cost
FOB California - The buyer in NJ pays the freight
seller
buyer
FOB Destination - seller pays the freight cost
FOB New Jersey - The seller in CA pays the freight

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

9. Single Trade Discount 30%
The price of office equipment is $3,000. The manufacturer offers a 30% trade discount. What are the trade discount amount (TDA) and the net price?
30%
TDA = $3,000 x .30 = $900
Net Price = $3,000 - $900 = $2,100
Using Complement
$3,000 x .70 = $2,100

10. Calculating List Price When Net Price and Trade Discount Rate Are Known
List Price = Net Price
Complement of trade discount rate
Office equipment has a $2,100 net price and a 30% trade discount. What is the list price?
100% - 30% = 70%
$2,100
.70
LP = $3,000

11. Chain Discounts Two or more discounts: 15/10/5 To calculate discount
= 30%
Find the net price equivalent rate (multiply the complements)
100% 100% 100%
.85 x x =

12. Calculating Net Price Using Net Price Equivalent Rate
The price of a office furniture is $20,000. With a chain discount of 20/10/5, what is the net price?
Find the net price equivalent rate (multiply the complements)
.80 x .90 x .95 = .684
$20,000 x .684 = $13,680
Trade Discount Amount
$20,000 - $13,680 = $6,320

13. Calculating Trade Discount Amount Using Single Equivalent Discount Rate
The price of a office furniture is $20,000. With a chain discount of 20/10/5, what is the net price?
Find the net price equivalent rate (multiply the complements)
.80 x .90 x .95 = .684
Single equivalent rate
$20,000 x .316 = $6,320

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
6/24/05 PROPANE $3.22 $12.24
Total this invoice: $12.24
AMOUNT DUE: $12.24
Prompt Pay Discount: $0.19
Net Amount Due if RECEIVED by 7/10/05: $12.05
Due Date 7/26/05
Invoice No.
004433L
Invoice Date
6/26/05

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

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

18. Ordinary Dating Method
2/10, n/30 - “two ten, net thirty”
$500 x.02 = $10
$500 - $10 = $490 or
$500 x .98 = $490
$500 invoice dated May 3; terms 2/10, n/30; paid on May 10.
Discount Period
10 Days
No Discount
Day
May 3
May 13
June2
Credit Period (30 days)

19. Receipt of Goods (ROG) 1/10, n/60 ROG - Cash discount period begins
when the buyer receives the goods
$1,000 x.01 = $10
$1,000 - $10 = $990 or
$1,000 x .99 = $990
$1,000 invoice dated May 5, received goods June 7; terms 1/10, n/60 ROG; paid on June 17.
Invoice
Date
Discount Period
10 Days
No Discount
Day
May 5
June 7
June 17
Aug. 6
Credit Period (60 days)

20. End of Month (EOM)
2/10 EOM - 2% discount, up until the 10th of the following month
$400 invoice dated Sept. 3; terms 2/10 EOM; paid on October 8.
$400 x .02 = $8
$400 - $8 = $392 or
$400 x .98 = $392
Discount Period
ends on 10th
Invoice
Date
No Discount
11th - 30th
Sept.3
Oct 1
Oct. 10
Oct. 30
Credit Period

21. End of Month (EOM) 2/10 EOM - Consider the “25th rule” - Skip a month
$400 invoice dated Sept. 28; terms 2/10 EOM; paid on November 8.
$400 x .02 = $8
$400 - $8 = $392 or
$400 x .98 = $392
Discount Period
ends on 10th
Invoice
Date
No Discount
10th - 30th
Sept.28
No.v 1
Nov. 10
Nov. 30
Credit Period

22. Partial Payment
Sara owes $400. Sara’s terms were 3/10, n/30. Within 10 days Sara sent in a payment of $100. How much is her new balance?
1. Find the complement of discount rate
100% - 3% = .97
$100
.97 = $103.09
2. Divide partial payment by the complement
3. Subtract step 2 from the amount owed
$400 - $ = $296.91