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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Under the trade credit term '2/10, net 30', a supplier offers a cash discount of 2% if payment is made within 10 days, otherwise the full amount is due on day 30. Which of the following is the correct statement about the credit period for which the buyer effectively pays a cost if it forgoes the discount?

The relevant period is 20 days. Under 2/10 net 30, paying on day 30 rather than day 10 gives the buyer only 20 extra days of credit, so the cost of forgoing the discount is annualised using this 20-day gap, not the full 30-day credit period.

  1. A20 days, being the gap between the end of the discount period and the due dateCorrect
  2. B30 days, being the full credit period
  3. C10 days, being the discount period
  4. D40 days, being the sum of the discount and credit periods

Explanation

If the buyer skips the discount it pays on day 30 instead of day 10, so it gets 30 - 10 = 20 extra days of credit. The cost of forgoing the discount is annualised over these 20 days. Using 30 days would wrongly include the period during which payment would have been made at the discounted price anyway.

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