Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 36

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. What is the appropriate accounting treatment for purchase discounts