Chapter 7: Q1DQ (page 342)
How do sellers benefit from allowing their customers to use credit cards?
Sellersare individuals or groups whose primary responsibility is tosell a company’s product to anend customer or user in the market.
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BTN 7-7 The co-founders of ReGreen Corporation are introduced in the chapter’s opening feature. Assume that they are considering two new selling options.
Plan A. ReGreen would begin selling instruction videos on reducing water usage online directly to customers. The new online customers would use their credit cards. The company has the capability of selling instructional videos through its website with no additional investment in hardware or software. Annual credit sales are expected to increase by \(250,000.
Costs associated with Plan A: Cost of these new sales is \)135,500; credit card fees will be 4.75% of sales; and additional recordkeeping and shipping costs will be 6% of sales. Instructional video sales will reduce consulting sales for ReGreen by \(35,000 annually because some customers will now only purchase instructional videos—assume that consulting sales for ReGreen have a 25% gross margin percentage.
Plan B. ReGreen would expand to more cities. It would make additional annual credit sales of \)500,000 to customers in those new cities.
Costs associated with Plan B: Cost of these new sales is $375,000; additional recordkeeping and shipping costs will be 4% of sales; and uncollectible accounts will be 6.2% of sales.
Required
1. Compute the additional annual net income or loss expected under (a) Plan A and (b) Plan B.
2. Should the company pursue either plan? Discuss both the financial and nonfinancial factors relevant to this decision.
At year-end (December 31), Chan Company estimates its bad debts as 0.5% of its annual credit sales of \(975,000. Chan records its bad debts expense for that estimate. On the following February 1, Chan decides that the \)580 account of P. Park is uncollectible and writes it off as a bad debt. On June 5, Park unexpectedly pays the amount previously written off.
Prepare the journal entries of Chan to record these transactions and events of December 31, February 1, and June 5.
Solstice Company determines on October 1 that it cannot collect $50,000 of its accounts receivable from its customer P. Moore. Apply the direct write-off method to record this loss as of October 1.
At each calendar year-end, Mazie Supply Co. uses the percent of accounts receivable method to estimate bad debts. On December 31, 2017, it has outstanding accounts receivable of \(55,000, and it estimates that 2% will be uncollectible.
Prepare the adjusting entry to record bad debts expense for year 2017 under the assumption that the Allowance for Doubtful Accounts has
At December 31, 2017, Ingleton Company reports the following results for the year:
Cash sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(1,025,000
Credit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342,000
In addition, its unadjusted trial balance includes the following items:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . \)575,000 debit
Allowance for doubtful accounts . . . . . . . . . . . . . 7,500 credit
Required
3. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2017, balance sheet given the facts in part 1c
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