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

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.

(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.


Solution Preview

(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 ...

Solution Summary

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