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CHAPTER 5
TRADE AND CASH DISCOUNT
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5.1 TRADE DISCOUNT
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Trade discount is a reduction from the list price offered
by wholesalers to retailers so they can resell the
merchandise at a profit.
The amount of discount that retailers receive from
wholesalers is known as trade discount amount.
Trade discount = List price – Net price
Trade discount rate is normally a manufacturer quotes a
discount rate in percentage to the retailer. The trade
discount rate must be calculated on the list price.
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The Formula for calculating the net price is
NP= L ( 1-r)
Example 1 pg 94
1. The list price of a leather belt is RM 180. a trade discount
of 30% is offered. What is the net price of the belt?
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Example 2 pg 95
Weendy jean offers a discount of 32 ¼ % on all the jeans it
sells. What is the net price of a pair of jeans that is listed
at RM 420?
Example 3 pg 95
The net price of a camera with 40% trade discount is RM 480.
what is the list price.
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Example 4 pg 95
A bill of RM 1200 including a prepaid handling charge of
RM 200 is offered a trade discount of 15%. What is the
net price?
Example 5 pg 95
Blue Danube sells an item for RM 100 less 20% while
Yellow River sells the same item for RM 120 less 40%
a) Find the net prices of the item for the two shops.
b) What further discount percentage must offered by
the shop that sells at a higher net price in order to
meet the competitor’s price?
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5.2 CHAIN DISCOUNT
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A trade discount in a series of two or more successive
discounts.
Wholesaler lists the chain discount as a group, for
example 15%, 10%, 5%.
These discounts might also be given in circumstances
such as when a large quantity is ordered.
NP = L(1 - r1) (1 – r2) (1 – r3)
Where:
NP = Net price
L = List price
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Example 1 pg 97
A computer is advertised for RM 4800 less 20% and 10%. Find
a) The net price
b) The total discount.
Example 2 pg 98
A television set with a catalogue price of RM2500 is offered a
chain discount lf 30%, 10% and 5%. Calculate the net
price.
Example 3 pg 98
A washing machine is advertised at RM 2000 less RM 40%,
12% and 2 ½ %. Find the net price.
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5.3 SINGLE DISCOUNT EQUIVALENT
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A single discount equivalent is a single discount which
is equivalent to a chain discount.
The single discount equivalent, r for a chain discount of
r1, r2 and r3 is given by:
r = 1 – (1 - r1) (1 – r2) (1 – r3)
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Example 1 pg 99
A product is advertised at RM 1500 less 20%, 10% and 5%.
Find
a) The single discount equivalent,
b) The net price.
Example 2 pg 99
Find the single discount equivalent of 10% and 3%
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5.4 CASH DISCOUNT
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Cash discounts are often stated under the heading of
invoice as, for example 3/10, 2/20, n/30.
This means, if the buyer pays the invoice within 10 days
of the invoice date, the buyer is entitled to receive a 3%
discount or, if payment is made within 20 days from the
invoice date, the buyer will receive a 2% discount.
N/30 (sometimes written net 30) means the credit
period is 30 days.
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Example 1 pg100
An invoice dated 2 January 2005 for RM 4010 was offered cash
discount terms of 1/10, n/30. if the invoice was paid on 11
January 2005, what was the payment?
Example 2 pg 101
An invoice dated 10 April 2005 for RM 2300 was offered cash
discount terms if 3/10, 2/20, n/60. find the payment if the
invoice was paid on 28 April 2005?
Example 3pg 101
The total of an invoice with cash discount terms if 3/10, n/30
amounts to RM 2090 which includes a prepaid freight
charge of RM 50. find the amount that is needed to pay the
invoice within the cash discount period.
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Borrowing to take advantage of the cash discount
Not many businesses have sufficient cash in hand to take
advantage if the cash discounts offered. Many if these
companies borrow form banks using short term loans to
take advantage of the offer.
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Example 1 pg 102
On 20 may, Mei Lan purchased some goods invoiced at RM
3000 with cash discount terms of 3/10, n/30. in order to pay
the invoice on 30 May, she borrowed the money for 20 days
at 9% per annum simple interest. How much did she save
by borrowing to the advantage of the discount?
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5.5 PARTIAL PAYMENT OF INVOICE
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If a buyer pays only part of the invoice within the
discount period, he receives a proportionate fraction of
the cash discount that is offered.
He will only receive the full amount of the cash
discount if he settles all the payment
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Example 1pg 102
An invoice amounting to RM 3000 and dated 15 July 2004
offered cash discount terms of 10/15, n/30. find the amount
outstanding if the buyer paid RM 1000 on 20 July 2004
Amount paid = (credit given) x (1- discount rate)
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Trade and Cash Discount
Example 1 pg 103
An invoice of RM 10 000 and dated 18 April 2005 was offered
25% trade discount and cash discount terms of 9/10, n/30.
find
a) The trade discount offered,
b) The cash discount offered
c) The net payment if the invoice was paid on 28 April 2005
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Example 2pg 104
An invoice of RM 9000 dated 19 April 2005 was offered 13%
trade discount and cash discount terms of 3/10, n/30. find
the net payment if the invoice was paid on 30 April 2005.
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