here's an example where interest owed isn't included in determining cash available (it's also a good example to counter an example I posted a couple of pages ago that no one seemed to comment on as to why the discount wasn't taken into account at that time…while it is here obviously)….
Morton Company needs to pay a supplier's invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.
Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is:
Morton Co. must borrow $54,444 ($49,000 plus compensating balance of 10% of loan). To calculate: $49,000 represents 90% of the loan. $49,000 ÷ .9 = $54,444.
Interest at 12% per annum on this amount for 30 days, totals:
•0.12 × (30 ÷ 360) × $54,444 = $544.44 * 12 months = 13.33% (ANSWER)
The invoice total less the cash discount ($50,000 – 2%) is $49,000. This amount is used in this calculation because that is the amount required to pay the supplier's invoice and usable by the company.
.