Chapter 7, Problem 1BP

To determine

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

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 August 4.

Date	Account Title and Explanation	Debit ($)	Credit ($)
August 4	Accounts receivable-Carpenter M	3,700
	Sales revenue		3,700
	(To record the sales on credit)
August 4	Cost of goods sold	2,000
	Merchandise Inventory		2,000
	(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 August 10.

Date	Account Title and Explanation	Debit ($)	Credit ($)
August 10	Cash $\left(\$5,200-\$156\right)$	5,044
	Credit Card Expense $\left(\text{\$5,200}\times 3\text{\%}\right)$	156
	Sales revenue		5,200
	(To record the sale revenue)
August 5	Cost of goods sold	2,800
	Merchandise Inventory		2,800
	(To record the cost of sales)

Table (2)

Company has earned $5,200 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 $5,044, an increase in credit card expense (decrease in stockholders’ equity) is debited with $156, and an increase in sales revenue (Stockholders’ equity) is credited with $5,200.

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 $2,800 and decrease in merchandise inventory (decrease in asset account) is credited with $2,800.

Prepare journal entries to record the transaction made on August 11.

Date	Account Title and Explanation	Debit ($)	Credit ($)
August 11	Accounts Receivable $\left(\$1,250-\$25\right)$	1,225
	Credit Card Expense $\left(\text{\$1,250}\times 2\text{\%}\right)$	25
	Sales revenue		1,250
	(To record the sale revenue)
August 11	Cost of goods sold	900
	Merchandise Inventory		900
	(To record the cost of sales)

Table (3)

Company has earned $1,250 from credit card sales, and incurred 2% processing fee on its sales. This transaction increases accounts receivable, credit card expense, and sales revenue. Hence, an increase in accounts receivable (asset account) is debited with $1,225, an increase in credit card expense (decrease in stockholders’ equity) is debited with $25, and an increase in sales revenue (Stockholders’ equity) is credited with $1,250.

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 $900 and decrease in merchandise inventory (decrease in asset account) is credited with $900.

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

Date	Account Title and Explanation	Debit	Credit
August 14	Cash	$3,700
­­	Account receivable – Carpenter M		$3,700
	(To record the receipt of check from Person A against receivable )

Table (4)

To record the receipt of check on account, cash must be increased and accounts receivable must be decreased by $3,700. Hence, an increase in accounts receivable (account) is debited with $3,700, and a decrease in accounts receivable – Person A (asset account) is credited with $3,700.

Prepare journal entries to record the transaction made on August 15.

Date	Account Title and Explanation	Debit ($)	Credit ($)
August 15	Cash $\left(\$4,350-\$87\right)$	3,185
	Credit Card Expense $\left(\text{\$3,250}\times 2\text{\%}\right)$	65
	Sales revenue		3,250
	(To record the sale revenue)
August 15	Cost of goods sold	1,758
	Merchandise Inventory		1,758
	(To record the cost of sales)

Table (5)

Company has earned $3,250 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 $3,185, an increase in credit card expense (decrease in stockholders’ equity) is debited with $65, and an increase in sales revenue (Stockholders’ equity) is credited with $3,250.

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 $1,758 and decrease in merchandise inventory (decrease in asset account) is credited with $1,758.

Prepare the journal entry to write off the specified accounts.

Date	Account Title and Explanation	Debit	Credit
August 22	Allowance for doubtful account	$498
­­	Account receivable – Company C		$498
	(To record the write-off of uncollectible account receivable )

Table (6)

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 $498, and a decrease in accounts receivable – Person A (asset account) is credited with $498.

Prepare journal entry to record the amount received from Person A.

Date	Account Title and Explanation	Debit	Credit
August 25	Cash	$4,400
­­	Account receivable – Person A		$4,400
	(To record the cash received from Person A)

Table (7)

Company has received cash of $4,400 from Person A that was due and this increased the cash (asset account). Hence increase in asset account is debited with cash of $4,400. A decrease in accounts receivable – Person A (asset account) is credited with $4,400.