Jones Manufacturing sent Blue Company an invoice for equipment with a list price of $10,000. The invoice is dated July 27 with terms of 2/10, EOM. Blue Company is entitled to a 40% trade discount. If the invoice is paid on September 5, how much does Blue pay?
$5,550
To calculate the amount that Blue Company pays, we need to take into account the trade discount and any applicable discounts for early payment.
Step 1: Calculate the trade discount
Since Blue Company is entitled to a 40% trade discount, we need to calculate how much they will deduct from the list price.
Trade Discount = List Price x Trade Discount Rate
Trade Discount = $10,000 x 40% = $4,000
Step 2: Calculate the net amount
The net amount is the list price minus the trade discount.
Net Amount = List Price - Trade Discount
Net Amount = $10,000 - $4,000 = $6,000
Step 3: Determine the discount for early payment
The invoice terms state 2/10, EOM, meaning that if the payment is made within 10 days, a 2% discount applies.
Since the payment in this case is made on September 5, we need to check if it falls within the discount period.
The evaluation is done by counting the days from the invoice date (July 27) until the payment date (September 5).
If the number of days is less than or equal to 10, the discount applies; otherwise, no discount is applicable.
Days between the invoice date and payment date: September 5 - July 27 = 40 days
Step 4: Calculate the final payment amount
If the payment is made within the discount period, we will subtract the applicable discount from the net amount; otherwise, no additional discounts are applied.
Final Payment Amount = Net Amount - (Net Amount x Payment Discount)
Final Payment Amount = $6,000 - ($6,000 x 2%) = $6,000 - $120 = $5,880
Therefore, Blue Company will pay $5,880 for the equipment.
To calculate how much Blue Company pays for the equipment, we need to consider the trade discount and the terms of the invoice.
Step 1: Calculate the trade discount:
The trade discount is given as 40% of the list price:
Trade discount = 40% * $10,000 = $4,000
Step 2: Calculate the amount after the trade discount:
The amount after the trade discount is the list price minus the trade discount:
Amount after trade discount = $10,000 - $4,000 = $6,000
Step 3: Determine the discount period:
The terms of the invoice are 2/10, EOM, which means Blue Company can take a 2% discount if the invoice is paid within 10 days of the invoice date. If not, the full payment is due at the end of the month.
Step 4: Calculate the discount if paid within the discount period:
The discount if paid within the discount period is 2% of the amount after trade discount:
Discount = 2% * $6,000 = $120
Step 5: Calculate the net payment amount:
The net payment amount is the amount after trade discount minus the discount if paid within the discount period:
Net payment amount = $6,000 - $120 = $5,880
Therefore, Blue Company pays $5,880 for the equipment.