Discounts Flashcards
What are the three types of discounts and their definitions?
Trade Discount is a percentage of the normal price that is deducted for certain customers. It may be offered to regular customers to encourage loyalty or to customers that are other business (in trade) rather than individuals
Bulk Discount is when you offer a discount on the list price if the customer is buying a large number of units from it
Prompt payment discount is a conditional discount meaning the customer has to meet particular conditions to qualify for the discount. A prompt payment (early settlement) discount will be given on the invoice value if payment is made by a set date
Complete the following:
Mr grass purchased goods from arable Ltd who is not VAT registered. Mr grass is a regular customer and they offer him a 10% trade discount on all purchases Mr grass purchases goods with a list price of £500.
Work out the invoiced value after discount
List price of goods -10% trade discount = invoice value
£500 x 0.1 = 10% discount (£50)
£500 - £50 = £450 invoiced value
Work out the following:
Mr grass also purchased from Grays Ltd who is VAT registered as Mr grass is a regular customer graze offer him a 10% trade discount on all purchases Mr grass purchases goods with a list price of £500 excluding VAT
What is the gross invoiced value?
List price = £500
Trade discount 10% = £50 (£500 x 0.1)
Net invoice value £450 (£500 - £50)
VAT @ 20% = £90 (£450 x 0.2)
Gross invoiced value = £540 (£450 + £90)
List price - Discount = Net
Net x 0.2 = VAT
VAT + Net = Gross
Arable limited normally offer 30 days credit but if Mr grass settles his account within 14 days they will allow him a further 5% discount. In order to receive this discount Mr grass has to meet the conditions of paying early it is unknown at the time of raising the invoice whether Mr grass will take the discount or not so the invoice value will still be £450 (including MR Grass 10% trade discount) however if Mr grass does settle within 14 days he will not need to pay the full invoice value
What will the total amount payable be if mr grass promptly pays within 14 days?
Total invoice value = £450 (including 10% Trade discount)
Early settlement discount 5% = £22.50 (£450 x 0.05)
Payment if made within 14 days = £427.50
On issuing a VAT invoice that offers a prompt payment discount a supplier should enter the invoice into their accounts and record the VAT ignoring the prompt payment discount
As a supplier will not know if the prompt payment discount is to be taken up until they receive the payment or the early settlement period expires they must decide which method to use before issuing an invoice
What two methods could a supplier choose from in order to adjust their records if a prompt payment discount is subsequently taken up by a customer?
1) A credit note can be issued for the reduction in consideration
2) if the supplier does not wish to issue A credit note the original invoice must include the following information
- terms of prompt payment discount (including time and discount price)
- A statement that the customer can only recover as input tax the VAT actually paid to the supplier
Complete the following equations:
Toby is limited sells a TV to Mr Poe for £500
A trade discount of 20% is given and an early settlement discount of 2% is offered for payment within 14 days
Assuming that Mr Poe doesn’t make payment within 14 days how much VAT should be charged?
List price = £500
Trade discount = £100 (£500 x 0.2)
Net Invoice Value = £400 (£500 - £100)
VAT = £80 (net x 0.2)
Gross Invoiced = £480 (net + VAT)
This is because it states in the question that Mr Poe doesn’t make payment within 14 days thus you ignore the early settlement discount of 2%
Fill out the following sentences:
Trade discount is a discount to customers who _________ _____ ___________ with you
Bulk quantity discount is a discount in respect of a ________ __________ ___________
Prompt payment discount is a discount to _______ customers for _______ _______ ______ ________
Trade discount is a discount to customers who regularly do business with you
Bulk quantity discount is a discount in respect of a particularly large order
Prompt payment discount is a discount to credit customers for early settlement of the bill
Complete the following:
Rocky Ltd is preparing an invoice to be sent to L read Ltd for £2160 plus VAT
A prompt payment discount of 2% will be offered for payment within 10 days
1) what is the amount rocky limited should receive if payment is made within 10 days?
2) what is the amount rocky Ltd should receive in payment if not made within 10 days?
1) 2% discount
Net = £2160
Discount 2% = £43.20 (£2160 x 0.02)
Net - 2% discount = 2116.80 NET
Gross discounted amount = £2540.16 (net x 1.2)
2) no discount
Net = £2160
Gross invoiced = £2592 (net x 1.2)
