ecte creuit losses for the year by an adjusting entry. Accounts written off duri
ID: 2559223 • Letter: E
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ecte creuit losses for the year by an adjusting entry. Accounts written off during this first year have created a debit balance in the Allowance for Doubtful Accounts of $61,000. An analysis of aged accounts receivables indicates that the desired balance of the allowance account should be $12,500. 31 Made the appropriate adjusting entries for interest Required Record the foregoing transactions and adjustments in general journal form. SERIAL PROBLEM: KATE'S CARDS (Note: This is a continuation of the Serial Problem: Kate's Cards from Chapters 1 through 7.) SPS. Kate has put a lot of time and effort into streamlining the process to design and produce a greet- ing card. She has documented the entire process in a Quick Time video she produced on her iMac. The video takes the viewer through the step-by-step process of selecting hardware and software, andCards 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 receiptsExplanation / Answer
1. Advantages of giving credit
a. Increase in Sales Turnover - Giving credit increases the purchasing power of the customer. The customer who will not buy on cash today gets ready to purchase on credit. This increases sale of the company contributing to increased revenue.
b. Ease of paying for Customer - Giving credit makes helps customer to pay for the product which he/she might have not been able to pay for immediately. It makes life easier for them and they feel grateful towards the company which goes a long way in building a relationship with the customer and earning their loyalty.
c. Attract bigger customer base - Credit helps in attracting more customers and maintaing the loyalty of the current customer base
d. Enhances Companies repuation and standing in the market - Companies who offer credit form an image in the market of having a good cashflow. This enhances the repuation of the company and gives the customers an a postive standing of the company for the long run. This goes a long way incontributing towards customer loyalty and there increasing the turnover.
Disadvantages of Giving Credit
a. Companies should be careful while framing the terms of credit. Too much credit can create cashflow issue for the company which might hinder the day to day working.
b. One of the biggest diadvantages of giving credit is bad debts. There is a chance that the customer may not pay when the time for payment comes or they might not pay the full amount. The company might have to hire collection agencies for recovering money which leads to further cost to the company.
c. Giving credit via credit card means various typrs of charges to be paid to the bank such as processing charges, etc. This increases the cost to the company thereby reducing profits. Not to mention credit card frauds which are on the increase.
d. Accouting for Credit sales becomes a little complicated and difficult as compared to Cash sales. A track has to be kept of the outstanding amount from Debtors.
2. Precautions to be taken while extending credit to people like John
a. Any company before extending credit to the customer should create a credit policy. This policy should be in writing for future reference. This also enhances the credibility of the company as it gives an image that the company is doing things by the book and is serious about its business and finances.
b. Ask the customer asking for credit the following :
i. Complete a credit application form.
ii. Give trade credit references.
iii. Request a personal guarantee in writing.
iv. Request a security deposit.
c. The company should check references provided by the customer. It can also run a credit check to determine the credibilty of the customer.
d. A formal agreement must be signed with the customer citing the credit limits and payment terms. This helps to build a case against the customer in future if he/she refuses to pay when the time of payment comes.
3. The payment terms 2/10, n/30 mean if the buyer pays within 10 days of the sale, he is eligible for a discount of 2% on sale. Since John is paying within 10 days, he will be eligible for a discount of $100. The journal entries will be as follows:
When sale is recorded
Accounts Receivable ...Dr $5000.00
To Credit Sales A/c $5000.00
When money is received is within 10 days
Cash/Bank A/c ...Dr $4900.00
Cash discount on Sales...Dr $100
To Accounts Receivable A/c $5000.00
4. if John pays in 25 days, there will be no discount offered to him. The journal entries will be as follows:
When sale is recorded
Accounts Receivable ...Dr $5000.00
To Credit Sales A/c $5000.00
When money is received in 25 days
Cash/Bank A/c ...Dr $5000.00
To Accounts Receivable A/c $5000.00
5. If Kate decides to let the customers pay via credit cards, the bank will charge a processing fee of 2.5% on the payments made via credit card.On sales of $15000.00, the processing fee will come to (15000*2.5%) $375. The sales will be recorded as follows.
When sale is recorded
Accounts Receivable - Credit card A/c ...Dr $15000.00
To Credit Sales A/c $15000.00
When Bank receives the receipts from Kate and pays the money
Cash/Bank A/c ...Dr $ 14625.00
Bank charges A/c...Dr $325
To Accounts Receivable - Credit Card A/c $15000.00
The entry for Cost of Goods sold will be:
Cost of Goods sold A/c ...Dr $ 13,500
To Inventory A/c $13,500
Calculation of profit Kate made:
Sale $ 15,000.00 Less: Cost of Goods Sold $ 13,500.00 Gross profit $ 1,500.00 Less: Processing charges by Bank $ 375.00 Profit made $ 1,125.00Related Questions
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