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P-2: Ivan Rice is a new accountant with Wertz Company

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P-2.
Ivan Rice is a new accountant with Wertz Company. Wertz purchased merchandise on account for $6,000. The credit terms are 2/10, n/30. Ivan has talked with the company's banker and knows that he could earn 10% on any money invested in the company's savings account.

Instructions
(a) Should Ivan pay the invoice within the discount period or should he keep the $6,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Ivan forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $6,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

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Solution Summary

The solution explains the calculations for the answers to the questions. For (b), a proof is offered to backtest the calculations.

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(a) There is no doubt that Ivan should pay the invoice in time to receive the discount.

We can assess the difference by first calculating the discount ...

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