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1
Chapter 9
Discounts: Trade and
Cash
Prepared by Dr. Elena Skliarenko
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The
McGraw-Hill Companies. All rights reserved.
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#9
Discounts: Trade and Cash
LU9.1
Learning Unit Objectives
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
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The
McGraw-Hill Companies. All rights reserved.
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#9
LU9.2
Discounts: Trade and Cash
Learning Unit Objectives
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
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McGraw-Hill Companies. All rights reserved.
4
THE DISTRIBUTION CHAIN
Manufacturer
Retailer
Distributor
Wholesaler
Final Customer
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Trade Discount Amount & Net Price
Formulas
Trade discount amount = List
price x Trade discount rate
Net Price = List price - Trade
discount amount
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McGraw-Hill Companies. All rights reserved.
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Freight Terms
FOB Shipping Point - buyer pays the freight cost
FOB Quebec - The buyer in Ontario pays the freight
b
u
y
e
r
FOB Destination - seller pays the freight cost
FOB Toronto - The seller in Montreal pays
the freight
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McGraw-Hill Companies. All rights reserved.
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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
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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?
TDA = $3,000 x .30 = $900
Net Price = $3,000 - $900 = $2,100
Using Complement
$3,000 x .70 = $2,100
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9
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
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McGraw-Hill Companies. All rights reserved.
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Short Cut Formulas
To find amount of trade discount Dt, when list price and discount rate are given use
formula 9.1
Dt = L ·d
(9.1)
Substitute the known values and get the amount of Dt.
Dt = 2,700 · 0.4 = $1,080
To find the net price when the list price, amount of discount and discount rate are
given, use one of the two formulas: 9.2 or 9.3
N = L - Dt
(9.2)
or
N = L ( 1-d)
(9.3)
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McGraw-Hill Companies. All rights reserved.
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Chain Discounts
Two or more discounts:
15/10/5
To calculate discount
15 + 10 + 5 = 30%
Find the net price equivalent rate
(multiply the complements)
100% 100% 100%
-15
-10
-5
.85 x .90 x .95 = .72675
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McGraw-Hill Companies. All rights reserved.
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Chain Discounts
The price of 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
or find single equivalent rate
1.00 - .684 - .316
$20,000 x .316 = $6,320
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McGraw-Hill Companies. All rights reserved.
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Short Cut Formulas
There is a quicker way to calculate the net price after
multiple discounts. For this purpose we can use formula 9.3
with (1-d) factor for each of the discounts.
N = L (1-d1) (1-d2) (1-d3)
(9.5)
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Short Cut formulas
There is a shortcut way to find single equivalent discount rate. For this
purpose use formula 9.6:
de = 1- (1-d1) (1-d2) (1-d3),
(9.6)
where de is a single equivalent to discount rate.
To find amount of the trade discount with series discounts we can use
formula 9.7
Dt = L · de
(9.7)
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McGraw-Hill Companies. All rights reserved.
15
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 give buyers to pay invoices
Discount Period
Mar. 1
Mar. 10
Time period buyer has to take advantage of cash discount
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Exact-days-in-a-year calendar
Day of
month
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Ordinary Dating Method
2/10, n/30 - “two ten, net thirty”
$500 invoice dated May 3; terms
2/10, n/30; paid on May 10.
$500 x.02 = $10
$500 - $10 = $490
or
$500 x .98 = $490
Discount Period
10 Days
May 3
No Discount
Day 11 - 30
May 13
June2
Credit Period (30 days)
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Receipt of Goods (ROG)
1/10, n/30 ROG - Cash discount period begins
when the buyer receives the goods
$1,000 x.01 = $10
$1,000 invoice dated May 5, received
goods June 7; terms 1/10, n/60 ROG;
paid on June 17.
$1,000 - $10 = $990
or
$1,000 x .99 = $990
Invoice
Date
May 5
Discount Period
10 Days
June 7
No Discount
Day 11 - 30
June
17
Aug.
6
Credit Period (30 days)
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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
$400 x .02 = $8
EOM; paid on October 8.
$400 - $8 = $392
or
Invoice
Date
Sept.3
Discount Period
10 Days
Oct 1
No Discount
Day 11 - 30
Oct. 10
$400 x .98 = $392
Oct. 30
Credit Period
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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
Invoice
Date
Sept.28
Discount Period
10 Days
No.v 1
No Discount
Day 11 - 30
Nov. 10
Nov. 30
Credit Period
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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?
100% - 3% = .97
1. Find the
complement of
discount rate
$100
.97 = $103.09
2. Divide partial
payment by the
complement
$400 - $103.09 =
$296.91
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McGraw-Hill Companies. All rights reserved.
3. Subtract step
2 from the
amount owed
22
Short Cut Formulas
Amounts credited (Cr) to customer’s account will be bigger than the
amounts paid and may be calculated by formula 9.8:
Amount Credited = Amount Paid
(9.8)
P (1-d)
Cr 
(1  d )
Amounts paid within the discount period will be smaller than amounts
credited to the customer’s account and can be calculated by formula 9.9:
P = Cr · (1-d)
(9.9)
Outstanding balance is the difference between the balance at the
beginning of the transaction Bi and the amount credited.
Bo = Bi – Cr
(9.10)
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