Natalie has been approached by one of her friends, Curtis Lesperance. Curtis runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is very anxious to buy one of Natalie's fine European mixers because he would then be able to prepare larger batches of muffins and cookies. Curtis, however, cannot afford to pay for the mixer for at least 30 days. He has asked 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 given me a set of his most recent financial statements. What calculations should I do with the data from these statements? 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 another alternative to extending credit to Curtis for 30 days?
3. If, instead of extending credit to Curtis for 30 days, I have Curtis sign a promissory note and he is unable to pay at the end of the agreement term, will having that signed promissory note really make any difference?
4. I am thinking seriously about being able to have my customers use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card? Are there differences in the types of credit cards that my customers can use? The following transactions occur in April and May 2014:
April 1 After much thought, Natalie sells a mixer to Curtis for $1,050 (the cost of the mixer was $553). Curtis signs a two-month, 7.5% promissory note. Curtis can repay the note at any time before the due date, with interest accruing to the date of payment.
30 Curtis calls Natalie. He expects to pay the amount outstanding in the next week or so.
May 15 Natalie receives a cheque from Curtis in payment of his balance owing plus interest that has accrued.
Instructions
(a) Answer Natalie's questions.
(b) Prepare journal entries for the transactions that occurred in April and May.