It is typically beneficial for companies to take advantage of early-payment discounts allowed on purchases made on

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: 2/10, n/30?

2. What is the opportunity cost of not taking advantage of the discount associated with purchases made under the following terms: 1/10, n/30?

3. What is the appropriate accounting treatment for purchase discounts?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...