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Question: It is typically beneficial for companies to


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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2.99

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