Calculating trade discount, is Osborne wrong?

bailey54

Problem copied from Osborne's website:

A business sells goods which have a list price of £1,600. The following discounts are available to the buyer:

25% trade discount
5% settlement (cash) discount for settlement within 10 days

The total price (including VAT at 20%) for the goods shown on the invoice should be:

My calculation is:
1600 x 0.75 x 0.95 = 1140
1140 + VAT @ 20% = 1368

What am I doing wrong, because it says the answer is something else :-(

https://www.screencast.com/t/bKjbILE3

bailey54

It would seem I have a fundamental misunderstanding of how to calculate these things, because I have another issue with this problem (see the screenshot link below):

https://www.screencast.com/t/bCfDkxmCe

PROBLEM
Epic Supplies has sent the following goods to a credit customer, Clover Stationery.
The list price of the goods is £1 each, plus VAT at 20%. Clover Stationery is to be given a 20% trade discount and a 2% discount for settlement within 14 days.

You are to complete the columns of the following invoice.
Ensure that you enter both £ and pence amounts in the money columns, even if the pence amount is zero.

Any assistance would be appreciated

douglasstroud

Hi
You should not be deducting the prompt discount amount before the VAT, you should be charging VAT on the total goods minus the trade discount because you do not know whether the customer intends to take advantage of the discount.
If they do take advantage of it then a credit note can be issued for the reduction.

bailey54

Thank you douglasstroud for the credit note process, it makes sense now.

However regarding the calculation, if I recalculate the first exercise, without the prompt discount, I get 1440 as the answer but the correct 'answer' is saying that it should be 1428.

My working:
1600 x 0.75 = 1200 (25% trade discount)
1200 x 1.2 (adding VAT)
= 1440

So where is the 1428 from?

douglasstroud

Hi
Must confess I did not even look at the screenshots yesterday I just looked at your calculation and saw that you had included the prompt payment discount before applying the VAT
How old are these questions??
Before April 2015 the correct answer would have been £1428.00 because you were allowed to account for VAT at the discounted price
So £1600 - 25% - 5% = £1140 + 20% VAT = £1368 the VAT element being £228, this would be added to the Invoice of £1200 (total minus trade discount) to give the total of £1428
Since April 2015 the way of doing this has changed and you issue the Invoice minus the trade discount and then charge the VAT, you account for the PPD when it is received by the issue of a credit note.

Hope that makes sense

douglasstroud

Just had a quick look at the Osborne site and you are looking at an earlier version of the tests try

osbornebooks.rtahosting.co.uk/osborne50/q3.asp

alvinabish

bailey54 said:

Problem copied from Osborne's website:

A business sells goods which have a list price of £1,600. The following discounts are available to the buyer:

25% trade discount
5% settlement (cash) discount for settlement within 10 days

The total price (including VAT at 20%) for the goods shown on the invoice should be:

My calculation is:
1600 x 0.75 x 0.95 = 1140
1140 + VAT @ 20% = 1368

What am I doing wrong, because it says the answer is something else :-(

https://www.screencast.com/t/bKjbILE3

Uhh, what a complex analysis, but do not forget that the problem may arise from several considerations, not just those analyzed by you here. When I started trading I thought that way, but after a while I started thinking differently. And yes thanks to David Gardner, because from him I started to have another time of thinking, namely that critic combined with some creativity and theoretical knowledge. So when a problem arises you can see much more complex both its cause and that can be solved. But it is not bad either your analysis, I would even say that it is a fairly professional one

alvinabish

alvinabish said:

bailey54 said:

Problem copied from Osborne's website:

A business sells goods which have a list price of £1,600. The following discounts are available to the buyer:

25% trade discount
5% settlement (cash) discount for settlement within 10 days

The total price (including VAT at 20%) for the goods shown on the invoice should be:

My calculation is:
1600 x 0.75 x 0.95 = 1140
1140 + VAT @ 20% = 1368

What am I doing wrong, because it says the answer is something else :-(

https://www.screencast.com/t/bKjbILE3

Uhh, what a complex analysis, but do not forget that the problem may arise from several considerations, not just those analyzed by you here.

Uhh, what a complex analysis, but do not forget that the problem may arise from several considerations, not just those analyzed by you here. When I started trading I thought that way, but after a while I started thinking differently. And yes thanks to David Gardner, because from him I started to have another time of thinking, namely that critic combined with some creativity and theoretical knowledge. So when a problem arises you can see much more complex both its cause and that can be solved. But it is not bad either your analysis, I would even say that it is a fairly professional one