Chapter 7, Problem 1AP

To determine

Prepare journal entries to record the transactions and events of Company M.

Explanation of Solution

Credit card:

Credit card is an electronic card, which allows the credit card holders to buy something on credit at convenience without paying immediate cash.

Businesses allow customers to buy its products through store credit cards, such sales are termed as sales on store credit card. For such convenience, business charges some percentage as interest the total value of goods or services purchased on credit.

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Write-off:

Write-off refers to deduction of a certain amount from accounts receivable, when it becomes uncollectible.

Prepare journal entries to record the transaction made on June 4.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June 4	Accounts receivable	650
	Sales revenue		650
	(To record the sales on credit)
June 4	Cost of goods sold	400
	Merchandise Inventory		400
	(To record the cost of goods sold)

Table (1)

Sales on account increases accounts receivable, and sales revenue. Hence, an increase in accounts receivable (asset account) is debited, and an increase in sales revenue (Stockholders’ equity) is credited.

Recognition of cost of the goods sold increases the cost of goods sold account and decreases the merchandise inventory account. Hence, an increase in cost of goods sold (decrease in stockholders’ equity) is debited and decrease in merchandise inventory (decrease in asset account) is credited.

Prepare journal entries to record the transaction made on June 5.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June 5	Cash $\left(\$6,900-\$207\right)$	6,693
	Credit Card Expense $\left(\text{\$6,900}\times 3\text{\%}\right)$	207
	Sales revenue		6,900
	(To record the sale revenue)
June 5	Cost of goods sold	4,200
	Merchandise Inventory		4,200
	(To record the cost of sales)

Table (2)

Company has earned $6,900 from credit card sales, and incurred 3% processing fee on its sales. This transaction increases cash, credit card expense, and sales revenue. Hence, an increase in cash (asset account) is debited with $6,693, an increase in credit card expense (decrease in stockholders’ equity) is debited with $207, and an increase in sales revenue (Stockholders’ equity) is credited with $6,900.

Recognition of cost of the goods sold increases the cost of goods sold account and decreases the merchandise inventory account. Hence, an increase in cost of goods sold (decrease in stockholders’ equity) is debited with $4,200 and decrease in merchandise inventory (decrease in asset account) is credited with $4,200.

Prepare journal entries to record the transaction made on June 6.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June 6	Cash $\left(\$5,850-\$117\right)$	5,733
	Credit Card Expense $\left(\text{\$5,850}\times 2\text{\%}\right)$	117
	Sales revenue		5,850
	(To record the sale revenue)
June 6	Cost of goods sold	3,800
	Merchandise Inventory		3,800
	(To record the cost of sales)

Table (3)

Company has earned $5,850 from credit card sales, and incurred 2% processing fee on its sales. This transaction increases cash, credit card expense, and sales revenue. Hence, an increase in cash (asset account) is debited with $5,733, an increase in credit card expense (decrease in stockholders’ equity) is debited with $117, and an increase in sales revenue (Stockholders’ equity) is credited with $5,850.

Recognition of cost of the goods sold increases the cost of goods sold account and decreases the merchandise inventory account. Hence, an increase in cost of goods sold (decrease in stockholders’ equity) is debited with $3,800 and decrease in merchandise inventory (decrease in asset account) is credited with $3,800.

Prepare journal entries to record the transaction made on June 8.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June 8	Cash $\left(\$4,350-\$87\right)$	4,263
	Credit Card Expense $\left(\text{\$4,350}\times 2\text{\%}\right)$	87
	Sales revenue		4,350
	(To record the sale revenue)
June 8	Cost of goods sold	2,900
	Merchandise Inventory		2,900
	(To record the cost of sales)

Table (4)

Company has earned $4,350 from credit card sales, and incurred 2% processing fee on its sales. This transaction increases cash, credit card expense, and sales revenue. Hence, an increase in cash (asset account) is debited with $4,263, an increase in credit card expense (decrease in stockholders’ equity) is debited with $87, and an increase in sales revenue (Stockholders’ equity) is credited with $4,350.

Recognition of cost of the goods sold increases the cost of goods sold account and decreases the merchandise inventory account. Hence, an increase in cost of goods sold (decrease in stockholders’ equity) is debited with $2,900 and decrease in merchandise inventory (decrease in asset account) is credited with $2,900.

Prepare the journal entry to write off the specified accounts.

Date	Account Title and Explanation	Debit	Credit
June 13	Allowance for doubtful account	$429
­­	Account receivable – Person A		$429
	(To record the write-off of uncollectible account receivable )

Table (5)

To record this write-off, both allowance for doubtful accounts and accounts receivable must be decreased by the same amount. Hence, a decrease in allowance for doubtful accounts (contra asset account) is debited with $429, and a decrease in accounts receivable – Person A (asset account) is credited with $429.

Prepare the journal entry to receipt of check from Person M.

Date	Account Title and Explanation	Debit	Credit
June 18	Cash	$650
­­	Account receivable – Person A		$650
	(To record the receipt of check from Person A against receivable )

Table (6)

To record the receipt of check on account, cash must be increased and accounts receivable must be decreased by $560. Hence, an increase in accounts receivable (account) is debited with $560, and a decrease in accounts receivable – Person A (asset account) is credited with $560.