This preview shows pages 1–5. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: CASH D ISCOUNT 1. Compute the cost of not taking the following cash discounts. Cost of not taking = Discount % x 360 . a cash discount 100%  Disc. % Final due date – Discount period a. 2/10, net 40 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 40 10) Cost of not taking a cash discount = 2.04% x 12 Cost of not taking a cash discount = 24.48% b. 2/15, net 30 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 30 15) Cost of not taking a cash discount = 2.04% x 24 Cost of not taking a cash discount = 48.96% c. 2/10, net 45 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 45 10) Cost of not taking a cash discount = 2.04% x 10.29 Cost of not taking a cash discount = 20.99% d. 3/10, net 90 Cost of not taking a cash discount = (3% / 100%  3%) x (360 / 90 10) Cost of not taking a cash discount = 3.09% x 4.50 Cost of not taking a cash discount = 13.91% 2. Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds? Cost of not taking = Discount % x 360 . a cash discount 100%  Disc. % Final due date – Discount period Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 55 – 15) Cost of not taking a cash discount = 2.04% x 9 Cost of not taking a cash discount = 18.36% The cost of not taking the cash discount is greater than the cost of the loan (18.36% vs. 13%). The firm should borrow the money and take the cash discount. EFFECT IVE RATE OF I N TEREST 1. Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = ($50 / $4,000) x (360 / 45) Effective rate = 1.25% x 8 Effective rate = 10% 2. Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = ($45 / $3,000) x (360 / 50) Effective rate = 1.5% x 7.2 Effective rate = 10.80% 3. I.M. Boring borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal  I nterest Days loan is outstanding Effective rate on a discount loan = ($650 / $5,000  $650) x (360 / 360) Effective rate on a discount loan = ($650 / $4,350) x 1 Effective rate on a discount loan = 14.94% 4. Ida Kline borrows $8,000 for 90 days and pays $180 interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal  I nterest Days loan is outstanding Effective rate on a discount loan = ($180 / $8,000  $180) x (360 / 90) Effective rate on a discount loan = ($180 / $7,820) x 4 Effective rate on a discount loan = 2.30% x 4 Effective rate on a discount loan...
View
Full
Document
This note was uploaded on 09/13/2011 for the course ACCOUNTING 111 taught by Professor Berney during the Spring '11 term at Ashford University.
 Spring '11
 Berney

Click to edit the document details