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 Business Math: when is interest charged?
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Zubaida
Average Member

Saudi Arabia
13 Posts

Posted - 10/13/2012 :  00:15:43  Show Profile  Reply with Quote

Problem 1: For the given invoice amount, cash discount terms and ordinary interest rate, find how much could be saved on the transaction. $800; 2/10, n/60; 8%

2/10, n/60 means that buyers can take a 2% cash discount off the gross amount of the invoice if they pay the bill within 10 days from the invoice date. If buyers miss the discount period, the net amount—without a discount—is due between day 11 and day 60.

When calculating the amount due in the discount period, should I add interest to the amount due? Is interest charged in the discount period?When does the interest rate starts to be charged on the buyer? from the first day of the discount period or it will be charged if the buyer misses credit period?

Thank you,
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Ultraglide
Advanced Member

Canada
299 Posts

Posted - 10/13/2012 :  16:55:08  Show Profile  Reply with Quote
What the payment terms appear to say is that
1. If you pay within 10 days, you get a discount of 2% off the bill of $800.
2. If you pay between 11 and 60 days, you pay the full amount.
3. If you pay after 60 days, you pay interest of 8% (8% per annum, pro-rated).
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Zubaida
Average Member

Saudi Arabia
13 Posts

Posted - 10/13/2012 :  22:41:46  Show Profile  Reply with Quote
Thank you so much.
So, the buyer can save $16 ($800 * .02)if he pays the invoice amount within 10 days. The amount due within the first ten days: $800 * .98 = $784

Thank you,
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