Purchase Discounts It is typically beneficial for companies to take advantage of early-paymentdiscounts allowed on purchases made on credit. To see why this is the case, determine the effectiverate of interest associated with not taking advantage of the early-payment discount for each of thefollowing situations. Assume in each case that payment is made on the 30th day of the billing cycle.Required1. What is the opportunity cost of not taking advantage of the discount associated with purchases madeunder the following terms: 2/10, n/30? (Show calculations.)2. What is the opportunity cost of not taking advantage of the discount associated with purchases madeunder the following terms: 1/10, n/30? (Show calculations.)3. To motivate managers to take early-payment discounts, what is the appropriate accounting treatment forpurchase discounts?
Purchase Discounts It is typically beneficial for companies to take advantage of early-payment
discounts allowed on purchases made on credit. To see why this is the case, determine the effective
rate of interest associated with not taking advantage of the early-payment discount for each of the
following situations. Assume in each case that payment is made on the 30th day of the billing cycle.
Required
1. What is the opportunity cost of not taking advantage of the discount associated with purchases made
under the following terms: 2/10, n/30? (Show calculations.)
2. What is the opportunity cost of not taking advantage of the discount associated with purchases made
under the following terms: 1/10, n/30? (Show calculations.)
3. To motivate managers to take early-payment discounts, what is the appropriate accounting treatment for
purchase discounts?
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