Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
A) 2%
B) 12%
C) 18%
D) 36%

Question

Quizplus · Accepted Answer

The implied annual interest rate is 18%. This is calculated as follows:Discount rate = 1%Discount period = 10 daysCredit period = 30 daysAnnual interest rate = (Discount rate / Discount period) * (360 / (Credit period - Discount period))= (1% / 10 days) * (360 / (30 days - 10 days))= 18%

Farwell Company Purchased Merchandise with an Invoice Price of $2,000