Question

Michelle's Classic Clothing Store has extended credit to customers on open account. Its average experience for each of the past 3 years has been as follows:

Michelle Lebeck is considering whether to accept bank cards (for example, VISA or MasterCard). She has resisted because she does not want to bear the cost of the service, which would be 4% of gross sales.
The representative of VISA claims that the availability of bank cards would have increased overall sales by at least 10%. Regardless of the level of sales, the new mix of the sales would be 50% bank card and 50% cash.
1. How would a bank card sale of $300 affect the accounting equation? Where would the discount appear on the income statement?
2. Should Lebeck adopt the bank card if sales do not increase? Base your answer solely on the sparse facts given here.
3. Repeat requirement 2, but assume that total sales would increase 10%.

Answer 1

Micellle's Classic Clothing

Ans 1.

Bank Card sale amount =$300.

Bank Card service chanrge @4%=$300*4%=$12

Net Cash receipt =$300-$12=$288

Accounting Equation for the transaction :

				Shareholders' Equity		Income Statement
Assets	=	Liability	+	Equity	Retained Earning	<=====	Revenue	-	Expense	=	Net Income
Cash	=	0	+					-
288	=	0	+	0	288		300	-	12	=	288

The discount will appear as Bank Service Charge in the Other

Expense section of the Income Statement.

Ans 2.

If sales do not Increase using Bank Card.

Let Us assume Sales in $100

Without Bank Card , Net sales will be =$100 assuming all cash sales .

With Bank Card 50% will be cash & 50% will be through Bank Card

Cash Sales =$50

Bank Card sale =$50

Bank Card Service Charge @4%=50*4%=$2

Net Sales through Bank Card =$50-$2=$48

Total Sales $50+$48=$98

So there is a loss of 2% in Net sales after using Bank card.

Therefore , Bank card should not be used if sales do not increase.

Ans 3.

When Sales Increase by 10% by using Bank card.

New Total Sales =100*1.1= $110.

Cash Sale =50% =$55

Bank Card sale =$55

Bank Card Service Charge @4%=55*40%=$2.20

Net Sales through Bank Card =$55-$2.20=$52.80

Total Net sales =$55+$52.8=$107.8

So there is a net Increase of 7.8% in sales after using Bank Card.

Therefore Lebeck should adopt Bank card in this case.