Question

Exercise 5-14 Effect of credit card sales on financial statements LO 5-5

Ultra Day Spa provided $85,050 of services during 2018. All customers paid for the services with credit cards. Ultra submitted the credit card receipts to the credit card company immediately. The credit card company paid Ultra cash in the amount of face value less a 4 percent service charge.

Required

1. Record the credit card sales and the subsequent collection of accounts receivable in a horizontal statements model like the one shown here. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). If an element is not affected by the event, leave the cell blank.
2. Based on this information alone, answer the following questions:

1. (1) What is the amount of total assets at the end of the accounting period?
2. (2) What is the amount of revenue reported on the income statement?
3. (3) What is the amount of cash flow from operating activities reported on the statement of cash flows?

Answer 1

The credit card charges charged by bank will reduce the accounts receivable to that extent but the sales amount will remain the same.

In the above case, journal entry for sales and commission will be as follows -

Accounts Receivable.... Dr 81,648

Credit card charges ...... Dr 3,402

To Sales (Revenue) 85,050

4% service charges of 85,050 = $ 3,402

Sich credit card expense will get debited to Profit and Loss account. The sales amount will get credit to Profit and loss account.

While making cash flow, Profit before tax figure is considered and accounts receivable is shown under operating activities.

Hence the above cash flow will affect operating activity.

It is neither investing nor financing activity.

Credit card expense is regular expense as company accepts credit card payments. Hence, it won't come under financing activity as well.

When collection is done from credit card company, accounts receivable will be credited and bank account will be debited.

In such case, accounts receivable gets zero for particular sales.

This is the effect in cash flow.

Also, no horizontal pattern has been given to show the effect. Hence the answer contains all the details as required.

Investinf and financing activity will be blank as not affected.

Total sales for the period will be $ 85,050 as that is the total amount of sales made.

Total assets will be $ 81,648 being the Accounts Receivable amount. If the same is received the same will be shown under Bank balance.

No other details have been given to show the total assets balance.

Total accounts receivable will be $ 81,648. This is the amount that is receivable from credit card company after deduction of service charges.

If the same is received, the accounts receivable balance will be zero for this transaction.