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19 May, 21:35

On January 1, 2014, Shaffer Co. purchased inventory for $1,000 cash with credit terms of 2/10, n/30. If Shaffer does not pay within the discount period, what is the effective annual interest rate

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Answers (2)
  1. 19 May, 21:47
    0
    36.72%

    Explanation:

    credit terms of 2/10, n/30 means the customer must pay within 10 days to obtain a 2% discount, or can make a normal payment in 30 days

    Using this formula

    effective annual interest rate = Discount % / (1-Discount %) x (360 / (Full allowed payment days - Discount days))

    First calculate the difference between the payment date for an early payment discount, and due payment date, and divide into 360 days

    = 360days / (30 - 10) days

    = 18 days

    To calculate the interest rate being offered through 2/10 net 30 terms terms, Subtract the discount percentage from 100%

    100% - 2% = 98%

    Now divide discount percentage 2% by 98%

    = 0.0204.

    To calculate the effective annual interest rate, multiply the number of days by the interest rate

    = 18 * 0.0204

    = 36.72%
  2. 19 May, 22:04
    0
    36.73%

    Explanation:

    EAR = Discount % / (100-Discount %) x (360 / (Full allowed payment days - Discount days))

    = 2% / (100%-2%) * (360 / (30-10)) = 0.0204 * 18 = 36.73%
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