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.
Explanation:
When Donna’s Boutique accepts a Visa card for a $750 purchase, the transaction involves both the amount of the sale and the service fee that Visa charges for processing the payment.
- Sale Amount:
- The total amount of the sale is $750.
- This represents the amount the customer is paying for the goods or services, which will eventually be deposited into Donna’s Boutique’s account, less any service fees.
- Visa Service Fee:
- Visa charges a 2% service fee on the total sale.
- To calculate this, we multiply the sale amount by 2%:
[ 750 \times 0.02 = 15 ] - This means Visa will keep $15 as a service fee, and Donna’s Boutique will receive the remaining $735.
- Cash Received:
- After the service fee is deducted, the actual amount of cash Donna’s Boutique will receive is $735. This amount will be deposited into the boutique’s account after processing.
- Journal Entry:
- The entry to record this transaction needs to reflect the sale and the service fee charged by Visa.
- Debit: Donna’s Boutique will debit Accounts Receivable (or possibly “Cash” if they receive the full amount upfront) for the total sale amount of $750.
- Credit: The boutique will credit Sales Revenue for $750, recognizing the total sale.
- Credit: The service fee of $15 charged by Visa is recognized as a Service Charge Expense. This is an expense incurred by the business for using the Visa payment system, so a debit will be made to the Service Charge Expense account.
- Credit to Cash: Since the boutique will actually receive $735 (after deducting the service charge), the Cash account is credited by $735.
Thus, the credit to Cash is $735, reflecting the amount Donna’s Boutique will receive after the Visa service fee. The $15 service fee is recorded separately as an expense in the journal entry, and not as part of the cash received.
Conclusion:
Therefore, the correct answer is a. credit to Cash of $735, as that reflects the actual amount received by Donna’s Boutique after Visa’s service fee has been deducted.