Chapter 17 Problem 4 Cash Discounts. You place an order for 900 units of Good X

Question

Chapter 17
Problem 4
Cash Discounts. You place an order for 900 units of Good X at a unit price of $46.00. The supplier offers terms of 1/20, net 35.

a. How long do you have to pay before the account is overdue? If you take
the full period, how much should you remit?
b. What is the discount being offered? How quickly must you pay to get the
discount? If you do take the discount, how much should you remit?
c. If you don’t take the discount, how much interest are you paying implicitly?
How many days’ credit are you receiving?

Explanation / Answer

a. How long do you have to pay before the account is overdue? 35 days.

If you take the full period, how much should you remit?

900 units X $46.00 = $41,400

b. What is the discount being offered? 1% of the purchase price.

How quickly must you pay to get the
discount? 20 days

If you do take the discount, how much should you remit?

$41,400 X (1-0.01) = $41,400 X 0.99 = $40,986

c. If you don’t take the discount, how much interest are you paying implicitly?

($41,400 - $40,986 ) / $40,986 = $414 / $40,986 = 1/99 = 0.01010101 = 1.01% or $414 of interest

How many days’ credit are you receiving? 35 - 20 = 15 days

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