Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781260005042
Author: Wild
Publisher: MCG
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Chapter 7, Problem 1AP
To determine

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

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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.

DateAccount Title and ExplanationDebit ($)Credit ($)
June 4Accounts receivable650 
       Sales revenue 650
 (To record the sales on credit)  
 
June 4Cost of goods sold400 
        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.

DateAccount Title and ExplanationDebit ($)Credit ($)
June 5Cash ($6,900$207)6,693 
 Credit Card Expense ($6,900×3%)207 
       Sales revenue 6,900
 (To record the sale revenue)  
 
June 5Cost of goods sold4,200 
        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.

DateAccount Title and ExplanationDebit ($)Credit ($)
June 6Cash ($5,850$117)5,733 
 Credit Card Expense ($5,850×2%)117 
       Sales revenue 5,850
 (To record the sale revenue)  
 
June 6Cost of goods sold3,800 
        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.

DateAccount Title and ExplanationDebit ($)Credit ($)
June 8Cash ($4,350$87)4,263 
 Credit Card Expense ($4,350×2%)87 
       Sales revenue 4,350
 (To record the sale revenue)  
 
June 8Cost of goods sold2,900 
        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.

DateAccount Title and ExplanationDebitCredit
June 13Allowance 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.

DateAccount Title and ExplanationDebitCredit
June 18Cash$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.

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