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

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%

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%