Shaima buys merchandise on credit from Gant LLC worth $1,000 and is given 3/17 net 31 credit terms

a.Briefly explain what the different numbers above mean

b.If Shaima takes advantage of the discount, how much will she pay?

c.If Shaima does not take advantage of the discount, how much will she pay?

Solution :

a. When the credit terms are 3 / 17 net 31, it implies that the supplier is offering the creditor ( Shaima) a discount of 3 % on the invoice amount, if the amount due is paid within 17 days of the date of invoice.

Thus the Discount period is = 17 days. Else, the total period allowed for payment of the amount due as per the invoice is = 31 days .

b. If Shaima takes advantage of the discount, it means that the Invoice amount due is being paid within 17 days of the date of invoice.

The terms of Invoice state the discount offered for payment within 17 days of date of invoice = 3 / 17. This implies a 3 % discount on the Gross amount of invoice is offered if payment is made within 17 days.

Thus discount rate = 3 %

The cash discount = Gross amount due as per invoice * discount rate = $ 1,000 * 3 % = $ 30

Thus the net amount paid = Gross amount due as per invoice – Cash discount

= $ 1,000 - $ 30

= $ 970

Thus on taking advantage of the discount, the net amount paid by Shaima = $ 970 and the Cash discount received = $ 30

c. If Shaima does not take advantage of the discount, it means that the Invoice amount due is not paid within 17 days of the date of invoice. It is being paid within 31 days of the date of invoice.

Thus Shaima cannot avail any discount on the Invoice amount.

She will pay the total amount due on the invoice = $ 1,000