Question

Kate has put a lot of time and effort into streamlining the process to design and produce a greet- Cards from Chapters I through 7.) SPS The video takes the viewer through 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 nackage 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 leamed 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: ing card. She has documented the entire process in a QuickTime video she produced on her iMac. 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 subsequen рayment? 4. If instead of paying early, John pays in 25 days, what would be the journal entry to record th рayment? 5. Rather than providing the financing directly, assume that Kate decides to allow the use of cred cards. Further, assume that during the month there is $15,000 worth of credit card sales. Provi the journal entry to record the sales, along with the associated credit card fee. The cost of the goor sold total $13,500.

Answer 1

1. Advantage and disadvantage of offering Credit :

Advantages :

a. Meet the competition :

Offering trade credit will give a competitive edge over business rivals. Customers would generally favour the chance of selling and obtaining payment from their customers before having to pay for the goods you have sold to them

b. Increase in Sales:

An increase in sales may or may not happen when Kate start selling on credit. If her competitors are not offering credit terms, then she will gain sales by offering credit terms, because her customers will buy from her instead of having to pay cash from the competitors.

c. Better customer loyalty :

Offering credit to customers demonstrates trust. It is likely that a loyal customer will choose Kate over another business when bidding for goods or services.

Disadvantages of Offering Credit :

a. Potential for Bad Debts :

No matter how well she can check a customer's credit rating and references, eventually, there will be someone who doesn't pay. When that happens, if she turn over the account to a collection agency, she will incur fees. If collection efforts don't work, then she will need to write off the receivable as a bad debt.

b. Keeping Up With Accounts Receivable :

Someone needs to keep up with the status of Kate's accounts receivable. The reality is that customers don't always pay on time, and somebody needs to make calls or to send out past due notices. If there isn't already an employee in the office who can do this, she may need to hire a new employee which could add up the cost.

2. Precautions to take before offering credit :

Kates should check the consumer background. She should check whether his credibility is viable. She must ensure that even if people like John miss the credit period, she had a chance to recover the money. She should put 'late fee', if customers miss the deadline.

3. Journal entry on sale & discount earned by customer.

On sale date

John a/c (Debtor) Dr 5000

To sales a/c Cr 5000

(sales to John)

On receipt of amount where discount is given

Cash a/c Dr 4875

Discount on sales(expenses) Dr 125

To John a/c Cr 5000

(being settlment by John by availing discount of 2.5% on 5000}

4. Sale to John and amount received after due date of discount

On sale date

John a/c (Debtor) Dr 5000

To sales a/c Cr 5000

(sales to John)

On receipt (after discount period expired)

Cash a/c Dr 5000

To John Cr 5000

(Being settled by John)

5. Sales of Rs. 15000 and COGS is Rs. 13500

Debtors a/c Dr 15000

To Sales a/c Cr 15000

(on sales)

Sales a/c Dr 15000

Profit & loss a/c Cr 15000

(transfer of sales to p&l)

Profit & Loss a/c Dr 13,500

To Cost of Goods sold (COGS) Cr 15000

(Trandfer of COGS to p&l)

P&l will have net balance of 1500 as profit for the period