One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit.
Natalie comes to you for advice and asks the following questions.
1. “Curtis has provided me with a set of his most recent financial statements. What calculations should I do with the data from these statements, and what questions should I ask him after I have analyzed the statements? How will this information help me decide if I should extend credit to Curtis?”
2. “Is there an alternative other than extending credit to Curtis for 30 days?”
3. “I am thinking seriously about permitting my customers to use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card?”
The following transactions occurred in June through August.
June 1 After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,125 (cost of mixer $620).
2 Natalie meets with the bank manager and arranges to get access to a credit card account. The terms of credit card transactions are 3% of the sales transactions and a monthly equipment rental charge of $75.
30 Natalie teaches 12 classes in June. Seven classes were paid for in cash, $1,050; the other five classes were paid for by credit card, $750.
30 Natalie receives and reconciles her bank statement. She makes sure that the bank has correctly processed the monthly $75 charge for the rental of the credit card equipment and the 3% fee on the credit card transactions.
30 Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a one-month, 8% note receivable.
July 15 Natalie sells a mixer to a friend of Curtis’s. The friend pays $1,125 for the mixer by credit card (cost of mixer $620).
30 Natalie teaches 15 classes in July. Eight classes are paid for in cash, $1,200; seven classes are paid for by credit card, $1,050.
31 Natalie reconciles her bank statement and makes sure the bank has recorded the correct amounts for the rental of the credit card equipment and the credit card sales.
31 Curtis calls Natalie. He cannot pay today but hopes to have a check for her at the end of the week. Natalie prepares the appropriate journal entry.
Aug. 10 Curtis calls again and promises to pay at the end of August, including interest for 2 months.
31 Natalie receives a check from Curtis in payment of his balance plus interest outstanding.
(a) Answer Natalie’s questions.
(b) Prepare journal entries for the transactions that occurred in June, July, and August. The company uses a perpetual inventory system