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Question - 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: 4/15, n/30?
2. What is the opportunity cost of not taking advantage of the discount associated with purchases made under the following terms: 3/15, n/30?
3. To motivate managers to take early-payment discounts, what is the appropriate accounting treatment for purchase discounts?
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