Schofield Retailers accepted $40,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $40,000 and a debit(s) to
a. Cash for $38,400 and Service Charge Expense for $1,600.
b. Accounts receivable for $38,400 and Service Charge Expense for $2,400.
c. Cash for $40,000.
d. Accounts Receivable for $40,000.
The correct answer and explanation is :
The correct answer is:
a. Cash for $38,400 and Service Charge Expense for $1,600.
Explanation:
When Schofield Retailers accepts credit card payments for merchandise sold, the transaction needs to be recorded in a way that reflects both the revenue earned from the sale and the costs associated with using the credit card payment system.
In this case, the total charge for the merchandise sold is $40,000. However, the credit card company, Silver Bank, charges a 4% service fee for processing the transaction. The service charge is deducted from the total amount charged by Silver Bank, meaning Schofield Retailers does not receive the full $40,000.
Let’s break it down:
- Sales Revenue: Schofield Retailers made a sale of $40,000, so the company will recognize this as revenue by crediting Sales Revenue for the full amount of the transaction.
- Service Charge Expense: Silver Bank charges a 4% fee on the total sales amount. The service charge is calculated as:
[
40,000 \times 4\% = 1,600
]
This amount represents the cost to Schofield Retailers for processing the payment. It will be recorded as an expense, specifically Service Charge Expense, for $1,600. - Cash: After deducting the 4% service charge, Schofield Retailers will actually receive the remaining amount. This is calculated as:
[
40,000 – 1,600 = 38,400
]
Schofield Retailers will receive $38,400 in cash (or through a bank deposit), so the Cash account is debited for this amount.
The journal entry:
- Debit: Cash for $38,400 (the amount Schofield Retailers will actually receive after the service charge is deducted).
- Debit: Service Charge Expense for $1,600 (the fee charged by Silver Bank).
- Credit: Sales Revenue for $40,000 (the total amount of the sale, as per the merchandise sold).
Thus, the correct journal entry will match option a: Cash for $38,400 and Service Charge Expense for $1,600.