Hue Company Uses The Perpetual Inventory System And Allows C
Hue Company Uses The Perpetual Inventory System And Allows Customers T
Hue Company uses the perpetual inventory system and allows customers to use two credit cards in charging purchases. With the Omni Bank Card, Hue receives an immediate credit to its account when it deposits sales receipts. Omni assesses a 4% service charge for credit card sales. The second credit card that Hue accepts is the Continental Card. Hue sends its accumulated receipts to Continental on a weekly basis and is paid by Continental about a week later. Continental assesses a 2.5% charge on sales for using its card.
Required: Prepare journal entries to record the following selected credit card transactions of Hue Company.
- April 8: Sold merchandise for $8,300 (that had cost $6,134) and accepted the customer’s Omni Bank Card. The Omni receipts are immediately deposited in Hue’s bank account.
- April 12: Sold merchandise for $7,600 (that had cost $4,925) and accepted the customer’s Continental Card. Transferred $7,600 of credit card receipts to Continental, requesting payment.
- April 20: Received Continental's check for the April 12 billing, less the service charge.
Paper For Above instruction
Hue Company operates under the perpetual inventory system, which continuously updates inventory records for purchases and sales. The company accepts two types of credit card payments from customers: Omni Bank Card and Continental Card, each with distinct processing and payment protocols. Accounting for these transactions involves recording sales, recognizing receivables, accounting for service charges, and recording cash or bank receipt transactions when payments are received from card companies. Accurate journal entries are crucial for reflecting the financial position correctly and ensuring proper reconciliation with bank statements and credit card companies' reports.
Transaction on April 8: Sale with Omni Bank Card
On April 8, Hue sold merchandise valued at $8,300, which cost $6,134, and accepted the Omni Bank Card for payment. Since the Omni Bank Card is deposited immediately, the company recognizes the sale, accounts for the cost of goods sold, and records the cash received net of the service charge.
The gross amount of the sale is $8,300. Omni charges a 4% fee, which totals $332 (calculated as 8,300 x 0.04). Net cash received by Hue after deducting the service fee is $7,968 (8,300 - 332).
Journal Entry:
| Debit | Cash | 7,968 |
| Debit | Credit Card Expense | 332 |
| Credit | Sales Revenue | 8,300 |
| Debit | Cost of Goods Sold | 6,134 |
| Credit | Inventory | 6,134 |
Transaction on April 12: Sale with Continental Card
On April 12, Hue sold merchandise worth $7,600, costing $4,925. The company transferred the credit card receivable to Continental for payment. Unlike Omni, Continental does not deposit funds immediately but on a scheduled basis, which requires Hue to record accounts receivable and subsequent collection.
The sale records are made at the gross amount. Since the amount is transferred via credit card, the company does not recognize cash but an accounts receivable from Continental for $7,600.
Initial Recording of Sale and Receivable:
| Debit | Accounts Receivable – Continental | 7,600 |
| Credit | Sales Revenue | 7,600 |
| Debit | Cost of Goods Sold | 4,925 |
| Credit | Inventory | 4,925 |
Transfer of Receipts to Continental
In this scenario, Hue transfers the full amount of $7,600 to Continental on April 12, requesting payment. The transfer does not involve a cash receipt at this moment but rather a reduction in accounts receivable and recognition of a payable/transfer fee based on the credit card company's policy (if applicable).
Transaction on April 20: Receipt of Continental’s Payment
Continentals pays Hue about a week later, deducting a 2.5% service charge on sales amount. The service fee on $7,600 is $190 (7,600 x 0.025). Hue receives net cash of $7,410 (7,600 - 190).
Recording Receipt of Payment from Continental:
| Debit | Cash | 7,410 |
| Debit | Credit Card Expense | 190 |
| Credit | Accounts Receivable – Continental | 7,600 |
Summary
In conclusion, the journal entries for Hue Company regarding the credit card transactions involve careful recognition of sales revenue, inventory reduction, receivables, cash receipt, and the recognition of credit card service expenses. The company must monitor the timing differences between sale, transfer, and receipt of funds, accounting for the associated charges in each step to accurately reflect financial performance and position.
References
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