Exercise 7 13a Superior Carpet Cleaning Provided 76000 Of Se

Exercise 7 13a Superior Carpet Cleaning Provided 76000 Of Services D

Superior Carpet Cleaning provided $76,000 of services during 2013, its first year of operation. All customers paid for the services with major credit cards. Superior submitted the credit card receipts to the credit card company immediately. The credit card company paid Superior cash in the amount of face value less a 3 percent service charge. a. 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 financial activity(FA). Use NA to indicate that an element is not affected by the event. b. what is the amount of total assets at the end of the accounting period? what is the amount of revenue reported on the income statement? what is the amount of cash flow from operating activities reported on the statement of cash flow? Why would Superior Carpet Cleaning accept credit cards instead of providing credit directly to its customers? Why would they be willing to pay 3% of sales to have the credit card company handle its sales on account? EXERCISE 8-9A Sam's Subs purchased a delivery van on Jan. 1, 2013, for $35,000. In addition, Sam's paid sales tax and title fees of $1,500 for the van. The van is expected to have a four-year life and a salvage value of $6,500. a. using the straight-line method, compute the depreciation expense for 2013 and 2014. b. prepare the general journal entry to record the 2013 depreciation. c. assume the van was sold on Jan. 1, 2016, for $21,000. Prepare the journal entry for the sale of the van in 2016.

Paper For Above instruction

This paper provides a comprehensive analysis of Superior Carpet Cleaning’s financial activities during its first year of operation, focusing on the recording of credit card sales, asset management, and cash flows. Additionally, it explores the depreciation of a delivery van purchased by Sam's Subs and the accounting implications of its sale, illustrating core principles of financial accounting and reporting.

Introduction

In the realm of financial accounting, understanding how transactions are recorded and their subsequent impact on financial statements is critical. Superior Carpet Cleaning’s first-year operations exemplify key concepts such as revenue recognition, cash flow management, and the use of credit card processing. Meanwhile, the case of Sam’s Subs demonstrates asset depreciation accounting and the treatment of asset disposal in financial records. This analysis aims to provide clarity on these processes, emphasizing their application in real-world scenarios.

Recording Credit Card Sales and Collection for Superior Carpet Cleaning

Superior Carpet Cleaning’s primary transaction in 2013 involved providing services worth $76,000, paid via credit card. The initial recognition involves recording the sale and the expected cash inflow, considering the 3% service charge levied by the credit card company. When recording these transactions in a horizontal statement model, several accounts are affected, including Accounts Receivable, Cash, and Service Revenue.

The initial transaction records the sale and increases Accounts Receivable. Since the payment is processed through a credit card company, Superior recognizes a receivable and later accounts for the cash received net of the service charge. The recognition of revenue occurs simultaneously at the point of sale, while cash flow is affected when the credit card company disburses funds.

Horizontal Statements Model Illustration

Account Debit Credit Cash Flow Effect Activity
Accounts Receivable $77,922 NA NA
Cash $75,583.56 OA Operating Activity
Service Revenue $76,000 NA NA

The calculation for the cash received accounts for the 3% deduction:

$76,000 × (1 - 0.03) = $73,720; however, the accounts involved would reflect the gross and net amounts accordingly.

Financial Impact

The total assets at the end of the period increase primarily due to cash inflow from the credit card processor. The revenue reported on the income statement is the $76,000 service revenue, matching the amount of services provided. The cash flow from operating activities reflects the actual cash received, which after accounting for the 3% fee, is approximately $73,720. This illustrates the importance of considering service charges when evaluating cash flows from operations.

Rationale for Using Credit Cards and Service Charges

Superiors opt for credit card transactions rather than providing direct credit to customers because credit cards facilitate quick and efficient cash collection, thus improving cash flow liquidity. It also reduces the credit risk associated with customer non-payment. The 3% fee paid to the credit card companies compensates for the convenience, security, and processing services provided, ensuring prompt cash receipt and reducing administrative costs linked to credit management.

Depreciation of the Delivery Van for Sam’s Subs

Sam’s Subs purchased a delivery van at a cost of $36,500, including sales tax and title fees. The van’s useful life is estimated at four years with a salvage value of $6,500. Using the straight-line depreciation method, the annual depreciation expense can be calculated as follows:

Depreciation Expense = (Cost - Salvage Value) / Useful Life = ($36,500 - $6,500) / 4 = $7,500 per year.

Depreciation for 2013 and 2014

  • 2013: $7,500
  • 2014: $7,500

Journal Entry for 2013 Depreciation

The depreciation expense is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation:

Debit: Depreciation Expense $7,500


Credit: Accumulated Depreciation $7,500

Sale of Van in 2016

Assuming the van was sold for $21,000 on Jan. 1, 2016, the book value at the time must be determined before recording the sale. Accumulated depreciation over three years (2013-2015) totals $22,500 ($7,500 × 3). The book value is therefore:

Book Value = Cost - Accumulated Depreciation = $36,500 - $22,500 = $14,000

Since the sale price ($21,000) exceeds the book value ($14,000), a gain is recognized:

Journal Entry for Sale

Debit: Cash $21,000


Debit: Accumulated Depreciation $22,500


Credit: Delivery Van $36,500


Credit: Gain on Sale of Asset $6,000

This accounting treatment reflects the appreciation in asset value relative to its book value at sale, aligning with generally accepted accounting principles.

Conclusion

The processes of recording credit card sales, calculating depreciation, and accounting for asset disposal are fundamental to accurate financial reporting. Superior Carpet Cleaning’s handling of credit card transactions exemplifies effective revenue recognition and cash flow management, while Sam’s Subs demonstrates standard depreciation and asset sale accounting. These practices ensure transparency and compliance with accounting standards, enabling stakeholders to evaluate financial health accurately.

References

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