[thetoddgreen]

I stumbled upon this question and thought… how am I supposed to know this??

Which one of the following is the annual rate of interest applicable when not taking trade credit terms of “2/10, net 30?”
a)2.00%
b)24.00%
c)36.00%
d)36.73%

I put A, knowing it isn’t correct – so I could see their explanation. Their explanation was no help… saying the answer is D. The only thing I figure I can do with this info is take the 2% discount and annualize it, but it is asking what it is when NOT taking it, so…

Some enlightenment anyone?

[mckan514w]

ahh BEC I so do not miss you 🙂

so by not taking the trade terms you are missing out on 2% discount every thirty days- so you need to look at what it is going to cost you to lose that discount on an annualized basis.

To do this you divide the percentage of discount by 1 less the discount then multiply it by the number of days in a year (360 or 265) by trade days less term days to annualize it…

So above (.02/1-.02)* (360/30-10)

0r .0204* 360/20= 36.7%

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[CPAcandidate3]

By electing not to take it and hold onto the money 20 extra days the 36.7 is the annual interest rate you are paying.

[thetoddgreen]

@mckan514w Ahhhhh

Alright, so why is it the discount divided by 1 less the discount/reciprocal?

I get why its multiplied by 360/20 though

[CPAcandidate3]

Because you're getting a 2% discount by paying on the 10th day. So therefor you're borrowing 98% of the full price for 20 days but the 2% is based on the full price.

I don't know if that made any sense or not.

[fragchild]

You might want to read this article https://accounting-financial-tax.com/2010/08/what-is-cost-of-credit-and-how-is-it-computed/

However you're correct in saying why use 360 days? 360 is just a simple way in finance to determine a year. It is based on 30 days for 12 months (i.e. 30 x 12). Technically, 365 days is most accurate but for convenience 360 days is also used.

[Author]

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