1. Discounts: Trade and Cash
Chapter 07
Discounts: Trade and Cash
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Unit Objectives#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 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

3. Learning Unit Objectives#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

4. 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 Financial Management – Block/Hirt $ $ ,783.00
10 Introduction to Business- Nichols $ Total List Price $ , Less: Trade Discount 25% , Net Price $ , Plus: Prepaid Shipping Charge Total Invoice Amount $ ,383.50

5. 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, , = $4,258.50

6. 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

7. 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

8. 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

9. 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

10. Chain Discounts Two or more discounts: 20/15/10 To calculate discount
= 45%
Find the net price equivalent rate (multiply the complements)
100% 100% 100%
.80 x x = .612

11. Calculating Net Price with a Chain Discount
The price of a office equipment is $15,000. With a chain discount of 20/15/10, what is the net price?
$15,000
$12,000
$10,200
x .20
-3,000
- 1,800
- 1,020
$3,000
$9,180
x .15
x .10
$1,800
$1,020

12. 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

13. 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
= .388
Trade Discount Amount
$15,000 x .388 = $5,820

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 $0.00
6/24/10 PROPANE $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

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”
$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
July 5
July 15
Aug. 4
Credit Period (30 days)

19. Receipt of Goods (ROG) 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
May 9
July 8
July 18
Aug. 7
Credit Period (30 days)

20. 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
$600 x .99 = $594
Discount Period
ends on 10th
Invoice
Date
No Discount
11th - 30th
July6
Aug. 1
Aug. 10
Aug. 30
Credit Period

21. 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
Discount Period
ends on 10th
Invoice
Date
No Discount
10th - 30th
April 29
June 1
June 10
June 30
Credit Period

22. 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
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

23. Problem 7-23: Solution: NPF = .80 x .90 x .90 = .648
SED = = .352
Savings = $155 x .352 = $54.36
Final Price: $155 x .648 = $100.44

24. Problem 7-25: Solution: Net price
.95 x .98 x .99 = x $625 = $
= $576.06
Net price
x $625 = $48.94
Trade discount

25. Problem 7-26: Solution: Manufacturer A 1.0000 - .6873 .3127 = 31.27%
.3127 = 31.27%
.79 x .87 =
Manufacturer A
1.0000
.3192 = 31.92%
.74 x .92 =
Manufacturer B

26. Problem 7-27: Solution: a. $5,250 - $250 = $5,000 x .97 = $4,850
freight
$5,100
b. May 21 $5,250

27. Problem 7-31:
Solution:
$6,000
.70
= $8,571.43

28. Problem 7-35: Solution: $20,000.00 - 8,333.33 $8,000
$11, balance outstanding
$8,000
.96
= $8,333.33