Question

LG 3 P16-3, Credit terms Wendy Interior Design received four invoices with different credit terms. The manager needs to determine when the invoices, all dated March 25, need to be paid to avoid late-payment charges. A summary of the invoice credit terms are presented in the table. (Note: Assume a 365-day year.) Cash discount 2.0% 1.5 3.0 Cash discount period Credit period 15 days 30 days 10 60 7 45 15 30 Beginning of credit period date of invoice end of month date of invoice end of month 3.5 a. For each set of credit terms, write the shorthand expression of the credit terms. b. For each set of credit terms, calculate the number of days until full payment is due. c. For each set of credit terms, calculate the cost of giving up the cash discount. d. If the firm's cost of short-term financing is 12%, should Wendy Interior Design give up the cash discount for each of the invoice credit terms presented in the table?

Answer 1

Invoice Date March 25.			Ans a.	Ans b.	Ans c.
Cash discount	Cash discount period	Credit period	Beginning of credit period	Shorthand expression of Credit term	No of Days untill full payment is due	Cost of Giving up credit
2.00%	15 days	30 days	Date of Invoice	2/15 , n30	30	=2/98*[365/(30-15)] =49.66%
1.50%	10 days	60 days	end of month	1.5/10 ,n60	66	=1.5/98.5*[365/(66-10)=9.93%
3.00%	7 days	45 days	Date of Invoice	3/7 , n45	45	=3/97*[365/(45-7)=29.71%
3.50%	15 days	30 days	end of month	3.5/15,n30	36	=3.5/96.5*[365/(36-15) =63.04%

Formula for cost of credit not taken
Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period)

Ans d.
If the cost of short term finance is 12% , Wendy Interior Design should not give up the discounts except for the second invoice
as cost of giving up credit are higher than 12% for other invoices.