VISA and MasterCard are used to pay for a large percentage of retail purchases. The financial arrangements are similar for both bank cards. A news story provided the following example. Assume that a cardholder charges $500 for a dress to her VISA card. The merchant would then deposit the sales draft with its bank, which immediately credits $500 less a small transaction fee (say 4% of the sale) to the merchant’s account. The bank that issued the customer her card then pays the merchant’s bank $500 less a 3% transaction fee, allowing the merchant’s bank a 1% profit on the transaction.

1. Prepare the journal entry for the sale by the merchant.

2. Prepare the journal entries for the merchant’s bank concerning

(a) The merchant’s deposit,

(b) The collection from the customer’s bank that issued the card.

3. Prepare the journal entry for the customer’s bank that issued the card.

4. The national losses from bad debts for bank cards have recently been about 5% of the total billings to cardholders. If so, how can the banks justify providing this service if their revenue from processing is typically 3%–4%?