# Financial Accounting Sales Revenues

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```					Lesson 5

Revenues
Definition: The amount of inflowing assets from the sale of goods or services to customers. This amount is usually reflected in the sales price charged to the customer.

Lesson 5
Sales Revenues

Timing: Revenues are to be recognized and recorded in the period in which they are earned and not necessarily when cash is received from a customer. Revenues are typically earned when the goods sold have been delivered to the customer or services to be provided have been rendered.

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Complicating Revenue Transactions
1. The providing of sales or cash discounts to credit customers to encourage early payment on account. 2. The acceptance of merchandise returns from customers. 3. The uncollectibility of customer accounts receivable. 4. The acceptance of payment by credit cards.
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Example of Sales (Cash) Discount A company sells merchandise costing \$600 to a customer on account for \$1,000 with terms of 2/10, N/30. Entries if not paid within the discount period: Most Common Method At date of sale: Accounts Receivable Sales Revenues Cost of Goods Sold Inventory At date of collection: Cash Accounts Receivable

1,000 1,000 600 600

1,000 1,000

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If a penalty or interest is charged to a credit customer for payments received after 30 days, then:

Calculation of discount with terms of 2/10, N/30: \$1,000 x
\$980 Date of Sale 10th Day
Interest Rate 36% x x Principal Amount \$1,000 \$360 Annual Interest

2%

=

\$20

Discount Available

\$20 Discount Available 20 Days x \$1 Interest Per Day x x Time Period 1 Year = =

\$1,000 30th Day
Amount of Interest \$360 Annual Interest

Cash Interest Revenue

XXX XXX

=

\$1 of Interest Per Day

Rate x Principal x Time = Interest

Date of Sale

10th Day
Borrow \$980 from bank

10% x

\$980

x

20 = 360

\$5

30th Day
Payoff \$985 to bank

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5-1

A contra-revenue account is a reduction of a revenue account.
Sales Revenues Decrease Increase + DR + Sales Discounts Increase Decrease + CR + + + + + + +

Income Statement Presentation:
Sales Revenues Less: Sales Discounts Net Sales Revenues \$ 1,000 ( 20) \$ 980

Assets Liabilities Owners' Equity: Capital Stock Retained Earnings Revenues Expenses Dividends Sales Discounts

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At date of collection within discount period: Cash Sales Revenues Accounts Receivable 980 20 1,000

The most common method:
"Sales Returns and Allowances" is a contra-revenue account.
Entry at the date of return: Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold 150 150 100 100

Cash Sales Discounts Accounts Receivable

980 20 1,000

Why use the sales discount account if the net effect is the same? Why use the sales discount account if the net effect on net income is the same? Why use the sales discount account if the net effect on sales revenues and net income is the same?

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Income Statement Presentation:
Sales Revenues Less: Sales Discounts Sales Returns and Allowances Net Sales Revenues Less: Cost of Goods Sold Gross Margin (Profit) (9 Bikes x \$50 profit/bike) \$ 1,500 0 (150) \$ 1,350 (900) \$ 450

Gross Margin = Markup
Net Sales price per unit Cost of goods sold per unit Gross Margin or Markup per unit \$ 150 100 \$ 50

After the customer return of one unit, the net number of units sold were nine (9). Total Gross Margin or Markup on Sale: 9 × \$ 50 per unit = \$ 450 Gross Margin or Markup as a % of Sales: 450 50 = = 33.3% 1,350 150 Gross Margin or Markup as a % of Cost: 450 900 = 50 100 = 50.0%

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5-2

What would be the sales price at: 100 % markup on cost? 200 % markup on cost? \$200 \$300

What if the returned merchandise has no resale value and must be disposed of? Entry at the date of sale:
Accounts Receivable Sales Revenues Cost of Goods Sold Inventory 1,500 1,500 1,000 1,000

What was the cost of the company's return policy which allowed for the return of the one unit? Gross Margin before return: 10 x \$50/unit Gross Margin after return: 9 x \$50/unit Cost of return: = = \$ 500 450 \$ 50

Entry at the date of return:
Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold 150 150 100 100

Was it worth it to lose \$50 to gain a satisfied customer?

Simply exclude the inventory inflow portion of the entry. What is the effect of such a return on gross margin?

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Sales Revenues Less: Sales Discounts Sales Returns and Allowances Net Sales Revenues (9 x \$150) Less: Cost of Goods Sold (10 x \$100) Gross Margin The cost of a generous return policy: Gross margin before return of merchandise (inventory) Gross margin after return of resalable inventory Gross margin after return of unusable inventory

\$ 1,500 0 ( 150) \$ 1,350 (1,000) \$ 350

What kind of account is Sales Returns and Allowances? Contra-Revenue Is it a Real or Nominal Account? Nominal Why are we using Sales Returns and Allowances, a contra revenue account, rather than debiting Sales Revenues directly? Better information for management

\$ 500 \$ 450 \$ 350

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Problem #20

Problem #20

On April 3, 20X7, Smith, Inc. sold merchandise to Taylor Stores for \$100,000 with terms 2/10, n/30. On April 13, Taylor paid one half of the obligation to Smith, paying \$49,000 net of the discount. On May 2, Taylor paid \$34,000 on account and returned \$16,000 of merchandise, claiming that it did not meet contract terms for which Smith agreed to give full credit on account. Assume this returned inventory can be resold. A. Record the necessary journal entries on Smith's books for the April 3, April 13, and May 2 transactions. Assume the cost of merchandise to Smith, Inc. is 70 percent of its selling price. Determine Smith's ultimate gross margin on this sale to Taylor and the % markup on cost realized.

B. Assuming the returned inventory had not met Taylor's specifications and was a custom order that could not be resold, record the May 2 transaction and determine Smith's gross margin on this sale to Taylor and the resulting % markup on cost realized.

C. Why is it important to have separate accounts for Sales Returns and Allowances and Sales Discounts? Wouldn't it be much easier to directly reduce the Sales Revenue account for these adjustments?

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A. 4/3/X7

Accounts Receivable Sales Revenue Cost of Goods Sold Inventory (70% x 100,000) Cash Sales Discount (2% x \$40,000) Accounts Receivable Cash Accounts Receivable Sales Returns and Allowances Accounts Receivable Inventory (70% x 16,000) Cost of Goods Sold

100,000 100,000 70,000 70,000 49,000 1,000 50,000 34,000 34,000 16,000 16,000 11,200 11,200

Calculation of Gross Margin: Sales Revenue Less: Sales Discounts Sales Returns & Allowances Net Sales Revenues Less: Cost of Goods Sold Gross Margin % Markup on cost (\$24,400 / \$58,800) \$100,000 <1,000> <16,000> 83,000 <58,800> \$24,200 41% rounded

4/13/X7

5/2/X7

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Entry if inventory was not resalable: B. 7/20/X7 Cash Sales Return & Allowances Accounts Receivable * No entry to record inventory receipt.

34,000 16,000 50,000

C. It would be an easy and accurate representation of the economic effect of these transactions to simply debit sales revenues. However, the use of these contra revenue accounts quickly distinguishes information useful to management.

Calculation of Gross Margin:
Sales Revenue Less: Sales Discounts Sales Returns & Allowances Net Sales Revenues Less: Cost of Goods Sold Gross Margin % Markup on cost (\$13,000 / \$70,000) \$100,000 <1,000> <16,000> 83,000 <70,000> \$13,000 19% rounded

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Accounting for Uncollectible Accounts Receivable

General Ledger Accounts Receivable xxx 1/1/X1 xxx a. xxx xxx b. xxx xxx d. xxx xxx f. p. xxx xxx xxx r. 1/31/X1 5,000

Accounts Receivable Subsidiary Ledger M. Jones - Receivable xxx 1/1/X1 xxx d. p. xxx 400 1/31/X1 S. Longley - Receivable xxx 1/1/X1 a. xxx xxx i. 1/31/X1 900 J. Moss - Receivable xxx xxx 1/1/X1 c. f. xxx xxx k. xxx r. 1/31/X1 1,900 B. Oster - Receivable xxx 1/1/X1 q. b. xxx xxx 1/31/X1 1,800

c. i. k. q.

Total of all subsidiary ledger accounts must equal general ledger balance of \$5,000

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5-4

Example: Jones' Wholesale Candy, Inc. started business in January,
20X4. Prepare journal entries for the following summarized transactions for the year 'X4. - Jones' 20X4 total sales revenues amounted to \$120,000, of which 20% were cash sales and the remainder were sales made on account. The cost of merchandise sold amounted to \$70,000.
Cash (20% x \$120,000) Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 24,000 96,000 120,000 70,000 70,000

- 20X4 collections of accounts receivable amounted to \$85,000. Cash Accounts Receivable 85,000 85,000

Determine the 12/31/X4 balance of accounts receivable before any adjustment for uncollectible accounts. Accounts Receivable 0 96,000 85,000 12/31/X4 11,000 At 12/31/X4, based on a review of the A/R subsidiary ledger, none of the \$11,000 of accounts receivable is known to be uncollectible. However, in the following year it is discovered that a \$920 account is hopelessly uncollectible. The following entry would logically be made in 20X5: 1/1/X4

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Accounts Receivable 0 96,000 85,000 12/31/X4 11,000 At 12/31/X4, based on a review of the A/R subsidiary ledger, none of the \$11,000 of accounts receivable is known to be uncollectible. However, in the following year it is discovered that a \$920 account is hopelessly uncollectible. The following entry would logically be made in 20X5: 1/1/X4 Bad Debt Expense Accounts Receivable
920 920

How can the matching principle be complied with under the circumstances?
The Allowance Method uses estimation of uncollectible A/R to reflect Bad Debt Expense in the proper period and is required under GAAP.

What accounting principle would be violated with such an entry in 20X5?

Matching Principle
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Prepare an adjusting entry at 12/31/X4 assuming Jones' best guess at the time is that 10% of the 12/31/X4 balance of A/R will ultimately prove to be uncollectible.

Prepare an adjusting entry at 12/31/X4 assuming Jones' best guess at the time is that 10% of the 12/31/X4 balance of A/R will ultimately prove to be uncollectible.

Accounts Receivable 0 96,000 85,000 12/31/X4 11,000 10% x \$11,000 = \$1,100 1/1/X4
12/31/X4 12/31/X4

Accounts Receivable 0 96,000 85,000 12/31/X4 11,000 10% x \$11,000 = \$1,100 1/1/X4
1,100 1,100

Bad Debt Expense Allowance for Uncollectible A/R

1,100 1,100

Why is it improper to directly credit A/R in this entry? Instead, we will use a "contra asset" account to reflect this amount of estimated uncollectible A/R, call it the "Allowance or Reserve for Uncollectible Accounts Receivable."

Why is it improper to directly credit A/R in this entry? Instead, we will use a "contra asset" account to reflect this amount of estimated uncollectible A/R, call it the "Allowance or Reserve for Uncollectible Accounts Receivable."

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Balance Sheet
Current Assets: Accounts Receivable 11,000 Less: Allowance for Uncollectible A/R (1,100) Net Realizable Value 9,900 General Ledger: Allowance for Uncollectible A/R Accounts Receivable (Contra Asset) 0 1/1/X4 0 1/1/X4 1,100 Adjusting Entry 96,000 85,000 12/31/X4 11,000 1,100 12/31/X4 Subsidiary Ledger: Total of all individual customer accounts \$11,000

The next year... Assume the following summarized transactions take place in the second year of operations, 20X5, and prepare journal entries to record them. - 20X5 total sales revenues amounted to \$210,000, of which 70% were made on account and the remainder for cash. Assume that the cost of goods sold amounted to 60% of total sales revenues. Cash (30% x \$210,000) A/R (70% x \$210,000) Sales Revenues Cost of Goods Sold (60% x \$210,000) Inventory 63,000 147,000 210,000 126,000 126,000

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- Collections in 20X5 of the \$11,000 12/31/X4 balance totaled \$10,080 (all but \$920 from Bob's Candy Store was collected) and collections of \$117,600 of sales made on account in 20X5. Cash Accounts Receivable Cash Accounts Receivable 10,080 117,600 10,080 117,600

Allowance for Uncollectible A/R Accounts Receivable
1,100
Writeoff of Bob's Acct.

920 920 12/31/X4
Overestimation of Uncollectible A/R

Allowance for Uncollectible A/R
920 180

- The unpaid \$920 receivable was determined to be hopelessly uncollectible and was written off the books. Bad Debt Expense Accounts Receivable Allowance for Uncollectible A/R Accounts Receivable 920 920 920

Accounts Receivable
12/31/X4
Balance before writeoff

11,000 147,000 30,320 29,400

10,080 117,600 920

920

What is the effect of this writeoff entry on the Balance Sheet? - Zero effect on the Balance Sheet

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Allowance for Uncollectible A/R
1,100
Writeoff of Bob's Acct.

12/31/X4
Overestimation of Uncollectible A/R

920

180

Accounts Receivable
12/31/X4
Balance before writeoff

Allowance for Uncollectible A/R 1,100 12/31/X4 adjustment for estimated uncollectibles in 20X4 1,100 Writeoffs during 20X5 of 20X4 actual uncollectibles 920 12/31/X4 Balance

11,000 147,000 30,320 29,400

10,080 117,600 920 Before Writeoff \$ 30,320 (1,100) \$ 29,220 After Writeoff \$ 29,400 (180) \$ 29,220

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Balance Sheet
Accounts Receivable Less: Allowance for Uncollectible Receivables

12/31/X5 Balance before any adjustment for estimated uncollectibles in 20X5

UNDERESTIMATED 20X4 Uncollectibles 35

OVERESTIMATED 20X4 Uncollectibles 36

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How should this prior year overestimation of uncollectible A/R be corrected? - Go back and restate and reprint prior year's financial statements. - Compensate for the prior year error in estimation in the current year. If overstated bad debt expense in 20X4 by \$180, then understate it by \$180 in 20X5. Prepare the appropriate adjusting entry by Jones at 12/31/X5 for bad debt expense if Jones' best guess at this time of future uncollectible A/R is 8% of the balance of A/R. 8% x \$29,400 = \$2,352 If compensating for prior year overstatement of expense, then this year's expense should be \$2,352 - 180 = \$2,172

12/31/X5 Adjustment: Bad Debt Expense 2,172 Allowance for Uncollectible A/R 2,172 Allowance for Uncollectible A/R 12/31/X4 1,100 Writeoffs 920 12/31/X5 180 Pre-adjusted balance 2,172 12/31/X5 Adjustment 12/31/X5

2,352

(8% x \$29,400) Final Balance

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What would the 12/31/X5 adjusting entry have been if the allowance account had actually had a debit balance before adjustment, meaning that the writeoffs must have totaled \$1,280 rather than \$920, and therefore the 20X4 estimate would have been underestimated rather than overestimated? Allowance for Uncollectible A/R 1,100 12/31/X4 Writeoffs 1,280 Underestimated 180 12/31/X5 ? _____ Adjustment 2,352 (8% x 29,400) Bad Debt Expense Allowance for Uncollectible A/R 2,532 2,532

What would the 12/31/X5 adjusting entry have been if the allowance account had actually had a debit balance before adjustment, meaning that the writeoffs must have totaled \$1,280 rather than \$920, and therefore the 20X4 estimate would have been underestimated rather than overestimated? Allowance for Uncollectible A/R 1,100 12/31/X4 Writeoffs 1,280 Underestimated 180 12/31/X5 2,532 _____ Adjustment 2,352 (8% x 29,400) Bad Debt Expense (\$2,352 + 180) Allowance for Uncollectible A/R 2,532 2,532

Bad Debt Expense should be overstated in 20X5 to compensate for the \$180 understatement in 20X4.

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Aging of Accounts Receivable to Estimate Uncollectibles Balance of Accounts Receivable at 12/31/X5 Estimated uncollectibles: Aging of Accounts Receivable: \$29,400 8% × 29,400 \$2,352 Est. % Uncollect. Amount

Allowance for Uncollectible A/R 1,100 12/31/X4 Writeoffs 1,280 Underestimated 180 2,450 Adjustment 2,270 12/31/X5
Bad Debt Expense (\$2,270 + 180) Allowance for Uncollectible A/R 2,450 2,450

Current: Past Due: 0 - 30 days 30-60 days 60-90 days 90 + days

\$ 15,000 8,000 3,000 2,000 1,400 29,400

5%

\$750

8% 10% 15% 20%

640 300 300 280 2,270
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Problem #21

On 1/1X4 the following account balances exist for the Zero Corporation: Accounts Receivable Allowance for Uncollectible Accounts Receivable DR (CR) \$246,000 (8,400)

A. "Allowance for Uncollectible Accounts Receivable" is a contra asset account that represents management's estimate for the total uncollectible accounts receivable at that time. Net Realizable Value of Accounts Receivable, 1/1/X4: Accounts Receivable Less: Allowance for Uncollectible A/R B. Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Cash Accounts Receivable Allowance for Uncollectible A/R Accounts Receivable 6,800 6,800 700,000 700,000 350,000 350,000 680,000 680,000 \$246,000 (8,400) \$237,600

Respond to the following: A. What kind of account is the "Allowance for Uncollectible Accounts Receivable" account? What does the account represent? Calculate the net realizable value of 1/1/X4 accounts receivable for Zero. B. Record the following summarized transactions for Zero Corp. for the year 20X4: - Sales on account amounted to \$700,000. The markup on inventory cost is 100%. - Collections on accounts receivable totaled \$680,000. - Writeoffs of uncollectible accounts receivable amounted to \$6,800. C. Prepare the proper 12/31/X4 adjusting entry for Zero Corp. if management estimates that 3% of the 12/31/X4 balance of accounts receivable will prove to be uncollectible.

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Problem #22

C.

Accounts Receivable 1/1/X4 Balance 246,000 680,000 700,000 6,800 12/31/X4 Balance 259,000 Allowance for Uncollectible Accounts Receivable 8,400 1/1/X4 Balance 6,800 1,600 12/31/X4 Balance before adjustment 6,176 7,776 Adjustment 12/31/X4 Balance after adjustment

Given the following information as of 12/31/X4, before any adjusting entry for 20X4 uncollectible accounts expense: DR(CR) Sales Revenues <760,000> Sales Discounts 3,700 Accounts Receivable 85,000 Allowance for Uncollectible Accounts Receivable <700> A. Prepare the 12/31/X4 adjusting entry if an aging of accounts receivable is available and the estimate of uncollectible receivables is as noted below: Days Past Due Current 1 - 30 30 - 60 60 - 90 90 - 120 over 120 A/R \$40,000 25,000 8,000 5,000 4,000 3,000 \$85,000 % Est. Uncollectible 3% 5% 10% 15% 20% 50%

Estimate of Uncollectible A/R at 12/31/X4: .03 x 259,200 = \$7,776 Adjusting Entry: Bad Debt Expense Allow for Uncollectible A/R 6,176 6,176

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Problem #22

a.

B. What would the adjusting entry required in A. have been if there had been a debit balance of \$700 in the Allowance for Uncollectible Accounts Receivable Account before the adjustment rather than a credit balance? C. Determine the net realizable value of accounts receivable after adjustment at 12/31/X4. D. Prepare the 20X5 entry to write off a \$500 account receivable from Mary Jones that was determined to be hopelessly uncollectible. E. If, subsequent to the Mary Jones writeoff, the company unexpectedly receives a check from Mary for \$500 as payment in full on her account, what journal entries would be required?

Estimated Uncollected Accounts Receivable: \$40,000 x .03 = \$1,200 25,000 x .05 = 1,250 8,000 x .10 = 800 5,000 x .15 = 750 4,000 x .20 = 800 3,000 x .50 = 1,500 \$6,300 Allowance for Uncollectible A/R XX Actual Writeoffs XX 700 Prior Year Overestimation Adjustment 5,600 6,300 12/31/X4 Balance 5,600 5,600 Prior Year Estimate

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Problem #22- Answer b. Allowance for Uncollectible A/R XX Prior Year Estimate Actual Writeoffs XX Prior Year 700 7,000 Underestimation Adjustment 6,300 12/31/X4 Ending Balance Bad Debt Expense Allowance for Uncollectible A/R c. Net Realizable Value of Accounts Receivable: Accounts Receivable Less: Allowance for Uncollectible A/R Allowance for Uncollectible A/R Accounts Receivable Accounts Receivable Allowance for Uncollectible A/R Cash Accounts Receivable 7,000 7,000 \$85,000 <6,300> \$78,700 500 500 500 500 500 500

Problem #23

Identify which of the following statements are true: A. The " Allowance for Uncollectible Accounts Receivable" account will always have a credit balance at year end following any adjustment for uncollectible accounts receivable. B. The "Allowance for Uncollectible Accounts Receivable" account balance must be closed to retained earnings at the end of an accounting period. C. Management's estimate of Uncollectible Accounts Receivable at year end will always equal the amount of "Bad Debt Expense" for the year. D. The matching principle requires that "Bad Debt Expense" be accounted for on an estimated basis rather than when uncollectibility of an account receivable is actually determined.

d. e.

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Credit Card Sales

A. True. B. False. C. False. D. True.
VISSA
Member
'S NORM S BURGER

Credit Check
erif dV Car icat ion

Bank credits restaurant's account. Bank charges fee to restaurant.

di t Cre

Electronic transfer of funds to cover the amount charged on credit card. Customer's Bank Restaurant's Bank

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Credit Card Sales Example: A company sells merchandise costing \$1,000 to a customer for \$2,000. The customer pays by providing a VISA card which is electronically processed at that time. The company has agreed to pay a 4% fee on all VISA sales for the right to accept VISA cards as payment. Entries at the date of sale: Cash Credit Card Expense Sales Revenues Cost of Goods Sold Inventory

Problem #24

China Lilly Restaurant accepts VISA credit cards and processes customer payments made with the card electronically at the time of the sale. China Lilly is charged a 3% fee on any amount paid through the card. A. Record the journal entry for a \$100 customer charge.

1,920 80 2,000 1,000 1,000

B. What amount would Lilly actually have to charge the customer if she wished to net \$100 after the credit card cost?

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A.

Cash Credit Card Expense Sales Revenue

97 3 100

B.

X = Amount to be charged to net \$100 cash X 97% = \$100 X = 100/.97 X = \$103.09

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