Question

Del Mar Company purchased inventory costing P2,000,000 (gross of purchase discounts based on payment terms 2/10, n/30). Del Mar wants to determine which is better regarding the purchase transaction whether to finance the purchase by issuing 20% simple interest note to a bank to avail the discount on the 10th day which is to be paid at the 30th day after the purchase, or to forego the discount and pay the gross purchase on the 30th day after the purchase. Assume 360 days per year is used in determining the interest. ·

What will be the nominal cost of trade credit?

· If Del Mar choose to avail the discount by issuing a note payable, how much will be the finance cost savings/additional cost?

Answer 1

2/ 10, n/30 means that a 2% discount can be taken by the buyer only if payment is received in full within 10 days and the full payment is expected in 30 days

Particulars	Values
Discount	2%
Credit Period	30 Days
Discount Days	20 Days
No. of days per anum	360

Disc Rate = [ Discount / ( 100 - Discount ) ] * [ No. of days in a year / ( Allowed Days - Discount Days ) ]
= [ 2 / ( 100 - 2 ) ] * [ 360 / (30 - 20 ) ]
= [ 2 / 98 ] * [ 360 / 10 ]
= [ 0.0204 ] * [ 36 ]
= 0.7344
I.e 73.44 %

Bank is offering a interest rate of 20% but the discount offered is 73.44%. Hence opt for the discount

Discount = P2,000,000 * 2% = P40000

Interst to be borrowed from the bank for 20 days= P 1960000 (2000000-40000)

Interest charges payable for 20 days = P 1960000 * 20% * 20/360

= P 392000 * 20/360

= P 21777.78

Net Savings = Discount recived - Interest payable to bank for 20 days

= P40000 - P 21777.78

= P 18222.22