Question

Chapter 8 Accounting for Receivables BIAL PROBLEM: KATE'S CARE SERIAL PRO This is a continuation of the serial Problem: Kate's Cards from Chapters 1 through 7.) (Note: This is a continuatio SP8. Kat Kate has put a lot of time and effort into stre and entort into streamlining the process to design and produce a greet- ing card. She has documented the entire process in a QuickTime video she produced on her iMac. The video takes the viewer through the sten.hu trougn the step-by-step process of selecting hardware and software, and shows how to design and produce the card. Kate has met many people who would like to get into the production of greeting cards, but are overwhelmed by the process. Kate has decided to sell the entire package (hardware, software, and video tutorial) to aspiring card producers. The cost of the entire package to Kate is $4,500 and she plans to mark it up by $500 and sell it for $5,000. John Stevens, an individual Kate met recently at a greeting card conference, would like to buy the pack- age from Kate. Unfortunately, John does not have this much cash and would like for Kate to extend credit. Kate believes that many of her customers will not be able to pay cash and, therefore, she will need to find some way to provide financing. One option she is exploring is to accept credit cards. She learned that the credit card provider charges a 2.5 percent fee and provides immediate cash upon receiving the sales receipts. Kate would like you to answer the following questions: 1. What are the advantages and disadvantages of offering credit?! 2. What precautions should she take before offering credit to people like John?! 3. If Kate grants credit to John, the terms will be 2/10, n/30. Assuming the payment is made during the 10-day discount period, what would be the journal entry to record the sale and then the subsequent payment? 4. If instead of paying early, John pays in 25 days, what would be the journal entry to record the payment? 3. Rather than providing the financing directly, assume that Kate decides to allow the use of credit cards. Further, assume that during the month there is $15,000 worth of credit card sales. Provide the journal entry to record the sales, along with the associated credit card fee. The cost of the goods sold total $13,500.

Answer 1

Answer to question SP8

1.Advantages of offering credit are (a) increase in customer base (b) increase in sales volume (c) more inventory turnover (d) it will help to place bulk order with supplier and to avail better discount.

Disadvantage of offering credit are there is possibility of default of payment by Debtors which ultimately will lead to cash crunch and bad debts

2. Better precaution that she can take is to get Notes from him for a specified period and to check whether he is honoring it on maturity. On the basis of his credit worthiness she can decide decide whether to continue to offer credit

3. Journal entry for credit sale is : Debit John Account and Credit Sales Account . Journal entry for allowing discount is : Discount Account Debit and Credit John Account. Journal entry on making payment is : Cash Account debit to John Account.

4. If john makes payment in 25 days , the journal entry will be : Debit Cash Account and credit John Account (full credit amount)

5. The journal entry will be : 1. To debit Credit card Bank Account 2.To debit Credit card commission and 3.To credit Sales Account\

Answer to question SP9:

1. The journal entry for the expenditure for the memory card is : Debit Repairs  Account and credit cash Account. The journal entry for the cost of Back-up system is : Debit Computer Account  and credit cash.

2. As the back up system is an asset having 5 years life period and added to computer , additional $50 depreciation has to be done and hence the total monthly depreciation would be $150.

3. Please find attachments - calculation of depreciation under both methods

500 2500 3000 500 2000 2500 500 1500 Depreciation - Straight Line Method Back up system Particulars $ Particulars To Cash 3000 By depreciation By Balance c/d 3000 To Balance b/d 2500 By depreciation By Balance c/a 2500 To Balance b/d 2000 By depreciation By Balance c/d 2000 To Balance b/d 1500 By depreciation By Balance c/a 1500 To Balance b/d 1000 By depreciation By cash 1000 Depreciation - Double Decling method Back up system To Cash 3000 By depreciation By Balance c/a 3000 To Balance b/d 2000 By depreciation By Balance c/a 2000 To Balance b/d 1333 By depreciation By Balance c/a 1333 To Balance b/d 889 By depreciation By Balance c/d 889 To Balance b/d 593 By depreciation By cash 593 2000 500 1000 1500 500 500 1000 1000 2000 3000 667 1333 2000 444 889 1333 296 593 889 93 500 593