Cost of failing to take the discount, Accounting Basics

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Cost of failing to take the discount

Problem:

Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart Bank offers a discounted loan for 20 days at a cost of $375.

Required:

Question 1: What is the cost of failing to take the discount?

Question 2: What is the effective interest rate on each of the loans?

Question 3: Should Slipshod take the cash discount?

Question 4: Which bank loan should Slipshod use? Please explain.

Note: Please provide step by step solution.

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