On April 5 Donna’s Boutique accepted a Visa card for a $750 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a
a. credit to Cash of $735.
b. debit to Cash of $750.
c. debit to Service Charge Expense of $15.
d. credit to Service Charge Expense of $15.
The correct answer and explanation is :
The correct answer is a. credit to Cash of $735.
Here’s a detailed explanation of why this is the correct answer:
On April 5, Donna’s Boutique made a sale of $750, accepting a Visa card for the payment. However, Visa charges a 2% service fee for processing the transaction. This means that the boutique will not receive the full $750, as Visa will retain 2% of the total amount as their fee.
Step-by-Step Breakdown:
- Amount of Service Fee:
The service fee charged by Visa is calculated as 2% of $750:
[
750 \times 0.02 = 15
]
Therefore, Visa will deduct $15 from the transaction amount. - Amount Donna’s Boutique Will Receive:
Donna’s Boutique will receive the remaining amount after the service fee is deducted:
[
750 – 15 = 735
]
So, Donna’s Boutique will receive $735 in cash. - Journal Entry:
To record this transaction in Donna’s Boutique’s accounting system, the following journal entries will be made:
- Debit to Accounts Receivable (or Visa Receivable) for the full amount of $750, because this is the total amount of the sale before the service fee.
- Credit to Sales Revenue for the full amount of $750, as the boutique made a sale of $750 worth of goods.
- Debit to Service Charge Expense for $15, representing the cost of Visa’s processing fee.
- Credit to Cash for $735, which is the amount Donna’s Boutique actually receives after Visa’s fee is deducted.
Correct Answer:
Since the cash received is $735, the correct journal entry will include a credit to Cash of $735.
Thus, the answer is a. credit to Cash of $735.
Why the Other Options Are Incorrect:
- b. debit to Cash of $750: This is incorrect because Donna’s Boutique doesn’t receive the full $750—Visa takes a 2% fee.
- c. debit to Service Charge Expense of $15: While the service charge of $15 is a legitimate expense, the question asks about the entry to record the transaction, not just the expense.
- d. credit to Service Charge Expense of $15: This is incorrect because the service charge is an expense, and expenses are debited, not credited.
So, the accurate and correct answer is a.