LO 7-6 Show how accounting for credit card sales affects financial statements.

All of the answers describe the reasons companies accept credit cards from their customers.

Which of the following is a cost of providing credit to customers?

Multiple Choice

• Uncollectible accounts expense

• Determining customers credit worthiness

• Recording keeping and collection costs

• All of the answers describe the reasons companies accept credit cards from their customers.

True

Many retail companies are motivated to incur credit costs because many customers are emotional buyers and offering credit generally leads to increases in sales revenue. This statement is

True or False

True

A company will earn more profit from a cash sale than from a credit card sale.

True or False

Zane will collect $480 cash from the credit card company.

The fee charged by the credit card company is $20 ($500 × 0.04). The customer will ultimately pay the credit card company $500, and the credit card company will pay Zane $480 ($500 − $20).

Zane Enterprises accepts a credit card as payment for $500 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Based on this information:

Multiple Choice

• Zane will pay the credit card company $480 cash.

• Zane will pay the credit card company $500 cash.

• Zane will collect $480 cash from the credit card company.

• Zane will collect $500 cash from the credit card company.

All of the answers describe effects that will occur as a result of recognizing this event.

Explanation: The sales revenue is $1,200. The credit card expense charged by the credit card company is $60 ($1,200 × 0.05). The customer will pay the credit card company $1,200 and the credit card company will pay Barron $1,140 ($1,200 − $60). Therefore, Barron’s assets (accounts receivable) increase by $1,140

Barron Company accepts a credit card as payment for $1,200 of services provided to a customer. The credit card company charges a 5% handling fee for its collection services. Select the answer that shows how the entry to recognize the event would affect Barron’s financial statements.

Multiple Choice

• Assets will increase by $1,140.

• Revenue will increase by $1,200.

• Expenses will increase by $60.

• All of the answers describe effects that will occur as a result of recognizing this event.

Option A

Explanation

Sales revenue = $950

Credit card expense = $38 ($950 sales revenue × 0.04 credit card fee)

The account receivable from the credit card company = $912 ($950 revenue − $38 expense)

Baltimore recognizes $950 revenue and $38 credit card expense resulting in net income of $912 which increases equity (retained earnings). Since the sale was on account, asset (accounts receivable from the credit card company) increases. Since the company has not collected cash from the credit card company, the statement of cash flows is not affected.

Baltimore Company accepts a credit card as payment for $950 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Select the answer that shows how the entry to record the event would affect Baltimore’s financial statements. The letters “NA” and “OA” indicate that the component of the equation is “Not Affected” and “Operating Activities” respectively.

	Balance Sheet					Income Statement					Statement of Cash Flows
	Assets	=	Liabilities	+	Equity	Revenues	−	Expenses	=	Net Income
A.	$ 912	=	NA	+	$ 912	$ 950	−	$ 38	=	$ 912	NA
B.	$ 912	=	$ 38	+	$ 874	$ 912	−	NA	=	$ 912	NA
C.	$ 912	=	$ 38	+	$ 874	$ 912	−	NA	=	$ 912	$ 912 OA
D.	$ 950	=	NA	+	$ 950	$ 950	−	NA	=	$ 950	$ 950 OA

Multiple Choice

• Option A

• Option B

• Option C

• Option D

Option B

Explanation

At the time the sale was made Beacon generated a $1,940 account receivable from the credit card company computed as follows:

Sales revenue = $2,000

Credit card expense = $60 ($2,000 sales revenue × 0.03 credit card fee)

The account receivable from the credit card company = $1,940 ($2,000 revenue − $60 fee)

The collection of the accounts receivable is an asset exchange event. One asset account (cash) increases by $1,940. Another asset account (accounts receivable) decreases by $1,940. The amount of total assets is not affected. The income statement is not affected by the collection event because revenue and expense were recognized previously when the sales event was recognized. Since the $1,940 cash inflow is associated with the collection of accounts receivable, it is classified as an operating activity.

Beacon Company accepts a credit card as payment for $2,000 of services provided to a customer. The credit card company charges a 3% handling charge for its collection services. Select the answer that shows how the collection of cash from the credit card company will affect Beacon’s financial statements. The letters “NA”, “OA” and “FA” indicate that the component of the equation is “Not Affected”, “Operating Activities” and “Financing Activities” respectively.

	Balance Sheet					Income Statement					Statement of Cash Flows
	Assets	=	Liabilities	+	Equity	Revenues	−	Expenses	=	Net Income
A.	NA	=	NA	+	NA	NA	−	NA	=	NA	$ 1,940 FA
B.	NA	=	NA	+	NA	NA	−	NA	=	NA	$ 1,940 OA
C.	$ 2,000	=	NA	+	$ 2,000	NA	−	NA	=	NA	$ 2,000 OA
D.	$ 1,960	=	NA	+	$ 1,960	NA	−	NA	=	NA	$ 1,960 OA

Multiple Choice

• Option A

• Option B

• Option C

• Option D

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	960
Credit Card Expense	40
Service Revenue		1,000

Explanation

Sales revenue = $1,000

Credit card expense = $40 ($1,000 sales revenue × 0.04 credit card fee)

The account receivable from the credit card company = $960 ($1,000 revenue − $40 expense)

Net income = $960 ($1,000 revenue − $40 expense)

The increase in the revenue account is offset by an increase in the accounts receivable and the credit card expense accounts. Increases in asset and expense accounts are recorded with debit entries.

Increases in revenue are recorded with credit entries. In this case, the accounts receivable and the credit card expense accounts are debited and the services revenue account is credited.

Westover Company accepts a credit card as payment for $1,000 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Select the journal entry that shows how recognizing the service revenue would be recorded.

Multiple Choice

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	1,000
Credit Card Expense	40
Service Revenue		1,040

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	960
Credit Card Expense	40
Service Revenue		1,000

Correct

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	1,040
Credit Card Revenue		40
Service Revenue		1,000

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	1,000
Credit Card Revenue		40
Service Revenue		960

Account Titles	Debit	Credit
Cash	960
Accounts Receivable – Credit Card Company		960

Explanation

Sales revenue = $1,000

Credit card expense = $40 ($1,000 sales revenue × 0.04 credit card fee)

The account receivable due from the credit card company = $960 ($1,000 revenue − $40 expense)

The collection of the accounts receivable is an asset exchange event. One asset account (cash) increases and another asset account (accounts receivable) decreases. Increases in assets are recorded with debit entries. Decreases in asset accounts are recorded with credits. In this case, the cash account is debited and the accounts receivable account is credited.

Westover Company accepts a credit card as payment for $1,000 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Select the journal entry that shows how collecting the account receivable from the credit card company would be recorded.

Multiple Choice

Account Titles	Debit	Credit
Cash	960
Accounts Receivable – Credit Card Company		960

Correct

Account Titles	Debit	Credit
Cash	1,000
Accounts Receivable – Credit Card Company		1,000

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	960
Cash		960

Account Titles	Debit	Credit
Accounts Receivable – Credit Card Company	1,000
Cash		1,000