Chapter 7

Discounts: Trade and

Cash
Practical Business Math Procedures, 12th Edition
Jeffrey Slater and Sharon Wittry

McGraw-Hill/Irwin Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning unit objectives
LU 7-1: Trade Discounts—Single and Chain
(Includes Discussion of Freight)
1. Calculate single trade discounts with formulas
and complements.
2. Explain the freight terms FOB shipping point
and FOB destination.
3. Find list price when net price and trade discount rate are known.
4. Calculate chain discounts with the net price equivalent rate and single
equivalent discount rate.
LU 7-2: Cash Discounts, Credit Terms, and Partial Payments
5. List and explain typical discount periods and credit periods that a
business may offer.
6. Calculate outstanding balance for partial payments.
Invoice
Trade Discount Amount &
Net Price Formulas
List price x Trade discount rate = Trade discount amount

$11,550 x 25% = $2,887.50

List price - Trade discount amount = Net Price

$11,550 - 2,887.50 = $8,662.50

Freight Terms
From Buyer Prospective
FOB Shipping Point - buyer pays the freight cost
FOB Boston - the buyer in San Diego pays the freight

s
e
ll b
e u
y
r e
r

From Seller Prospective

FOB Destination - seller pays the freight cost
FOB San Diego - the seller in Boston pays the freight
Complement
Complement - The difference between the
Complement single discount rate and 100%. The
complement is what percentage the buyer
will pay.

75%

25% For example, if the trade discount is

25%, the complement is 75% (100% --
25%).

Trade
Discount
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
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 = $2,700 list price
0.60
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% 100%
- 20 - 15 - 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

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 - 3,000 - 1,800 - 1,020
$3,000 $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 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
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 - 0.612 = 0.388
Net Price = 15000 x 0.612 =$ 9180
Trade discount amount:
$15,000 x 0.388 = $5,820
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. 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.

Invoice
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
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.
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 0.01 = $6
$600 - $6 = $594
or
$600 x 0.99 = $594
End of Month (EOM)
2/10 EOM – Considered the “25th rule;” skip a month. When seller sells good
after the 25th of the month, buyers gain an additional month.
Example: $800 invoice dated April 29; terms 2/10 EOM; paid on June 18.

No discount; $800 paid.

 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% = 0.98 Step 1. Find the complement of discount

rate.
$80 Step 2. Divide partial payment by the
0.98 = $81.63
complement (amount credited).
(1 - 0.02)
Step 3. Subtract Step 2 from the
amount owed (outstanding
balance).
$400 - $81.63 = $318.37
 DRILL Problem 7-1
Net Price Single Equivalent
List Chain Equivalent Discount Rate Trade Net
Item Price Discount Rate (in decimals) (in decimals) Discount Price
Apple iPad $799 3/1
.9603 .0397 $31.72 $767.28

Solution:

1.00 1.00
- .03 - .01
0.97 x 0.99 = .9603 x $799 = $767.28
1.0000
- 0.9603
0.0397 x $799 = $31.72
 DRILL Problem 7-4

List Chain Net Trade

Item Price Discount Price Discount

Trotter treadmill $3,000 9/4 $2,620.80 $379.20

Solution:

$3,000 x 0.8736 = $2,620.80 (0.8736 = 0.91 x 0.96)

$3,000 X 0.1264 = $379.20 (1 - 0.8736 = 0.1264)

 DRILL Problem 7-15
Gross Amount of
Invoice (freight
charge already Freight Date of Terms of Date of Cash Net Amount
included) Charge Invoice Invoice Payment Discount Paid
$7,000 $100 4/8 2/10, n/60 4/15 ? ?

Solution:

$138 (0.02 x $6,900)

($6,900 x 0.98 = $6,762 + 100) = $6,862

 DRILL Problem 7-19
Actual Partial Date of Amount of
Amount Invoice Payment Partial Payment to Balance
of Invoice Terms Date Made Payment Be Credited Outstanding
$700 2/10, n/60 5/6 $400 5/15 $408.16 $291.84

Solution:

$700.00
$400 = - 408.16
.98 $291.84