Sales

In the quarter ended 31 March 20X2, Charlie had taxable sales, net of sales tax, of $90,000 and taxable purchases, net of sales tax, of $72,000. If the rate of sales tax is 10%, how much sales tax is payable to the tax authority by Charlie?

• $1,800 receivable
• $2,000 receivable
• $1,800 payable
• $2,000 payable

Answer explanation

As sales exceed purchases, the excess sales tax is payable to the tax authorities.

A business sold goods that had a net value of $600 to Lahari. What entries are required by the seller to record this transaction if sales tax is applied at 17.5%?

• Dr Receivables $600, Dr Sales tax $105, Cr Sales $705
• Dr Receivables $705, Cr Sales tax $105, Cr Sales $600
• Dr Receivables $600, Cr Sales tax $105, Cr Sales $600
• Dr Sales $600, Dr Sales tax $105, Cr Receivables $705

Answer explanation

The receivables account should be debited with the full amount due from the customer, including the tax. The entry in the sales account should be for the sales value excluding sales tax. Sales tax payable to the tax authorities should be credited to the sales tax account (liability = credit balance)

Laker, a customer, returned goods to Streamer that had a net value of $200. What entries are required by Streamer to record this transaction if transactions are subject to sales tax is payable at 17.5%?

• Dr Returns inward $200, Dr Sales tax $35, Cr Receivables $235
• Dr Returns inward $235, Cr Sales tax $35, Cr Receivables $200
• Dr Purchases $200, Dr Sales tax $35, Cr Receivables $235
• Dr Receivables $235, Cr Returns inward $200, Cr Sales tax $35

Answer explanation

The receivables account should be credited with the full amount of the sales return, including the tax. The sales returns account should be debited with the value of the returns excluding the sales tax. The sales tax account should be debited with the amount of tax on the returns (since the tax is no longer payable).

Stung Co, which is registered to account for sales tax, purchased furniture on credit at a cost of $8,000, plus sales tax of $1,200. What are the correct accounting entries to record this transaction?

• Debit Furniture $9,200/ Credit Payables $9,200
• Debit Furniture $8,000/ Credit Sales tax $1,200 Credit Payables $6,800
• Debit Furniture $8,000/ Credit Payables $9,200 Debit Sales tax $1,200
• Debit Furniture $8,000/ Credit Payables $8,000

Answer explanation

The supplier is owed the full amount of the invoice, including the sales tax, so the credit entry in the payables general ledger account must be $9,200. The non-current asset account is recorded at cost excluding the sales tax. The input tax is recoverable, so debit the sales tax account with $1,200.

The following transactions took place during Ashvini’s first month of trading: • Credit sales of $121,000 exclusive of sales tax • Credit purchases of $157,110 inclusive of sales tax • Payments to credit suppliers of $82,710 inclusive of sales tax All transactions are subject to sales tax at 20%. What was the balance on Ashvini’s sales tax account at the end of the first month of trading?

• $1,985 DR
• $1,985 CR
• $15,770 DR
• $15,770 CR

Answer explanation

The sales tax on the credit purchases (input tax) exceeds the sales tax on sales (output tax), the balance on the account represents an amount due to Ashvini, therefore is an asset, a debit.

Which of the following statements is correct?

• Carriage inwards and carriage outwards are both accounted for as an expense in the statement of profit or loss.
• Carriage inwards and carriage outwards are both accounted for as income in the statement of profit or loss.
• Carriage inwards is treated as an expense and carriage outwards is treated as income in the statement of profit or loss.
• Carriage inwards is treated as income and carriage outwards is treated as an expense in the statement of profit or loss.

Answer explanation

Carriage inwards is an expense incurred in bringing goods purchased into the business, and carriage outwards is an expense incurred in delivering goods to customers.

ABC Co sold goods with a list price of $1,000 to Smith which was subject to trade discount of 5% and early settlement discount of 4% if the invoice was paid within 7 days. The normal credit period available to credit customers is 30 days from invoice date. At the point of sale, Smith was not expected to take advantage of early settlement terms offered. If Smith subsequently paid within 7 days and was eligible for the settlement discount, what accounting entries should be made by ABC Co to record settlement of the amount outstanding?

• Debit Bank $950, Debit Revenue $50 and Credit Receivables $1,000
• Debit Bank $950, Credit Revenue $38 and Credit Receivables $912
• Debit Bank $912, Debit Revenue $38 and Credit Receivables $950
• Debit Bank $912, and Credit Receivables $912

Answer explanation

Trade discount is always deducted when calculating the amount invoiced by the seller. In addition, as Smith was not expected to take account of the early settlement discount terms, the amount of revenue receivable is calculated after deduction of trade discount only at $950 ($1000 × 95%). When Smith subsequently pays early to be eligible for the discount, the accounting entries should reflect that fact and record settlement of the amount outstanding and also reduced revenue. Debit Bank $912 ($950 × 96%), Debit Revenue $38 ($950 × 4%), and Credit Receivables $950.

ABC Co sold goods with a list price of $2,500 to Jones which was subject to trade discount of 5% and early settlement discount of 4% if the invoice was paid within 7 days. The normal credit period available to credit customers is 30 days from invoice date. At the point of sale, Jones was expected to take advantage of the early settlement terms. If Jones subsequently paid within 7 days and was eligible for the settlement discount, what accounting entries should be made by ABC Co to record settlement of the amount outstanding?

• Debit Bank $2,280, Debit Revenue $95 and Credit Receivables $2,375
• Debit Bank $2,280 and Credit Receivables $2,280
• Debit Bank $2,375, Debit Revenue $125 and Credit Receivables $2,500
• Debit Bank $2,500, and Credit Receivables $2,500

Answer explanation

Trade discount is always deducted when calculating the amount invoiced by the seller. In addition, as Jones is expected to take account of the early settlement discount terms, the amount of revenue receivable is calculated after deduction of both trade discount and early settlement discount, a total of $2,280 ($2,500 × 95% × 96%). When Jones subsequently pays early to be eligible for the discount, the accounting entries should reflect the receipt of cash and clearance of the receivable for the amount expected as follows: Debit Bank $2,280 and Credit Receivables $2,280

ABC Co sold goods with a list price of $1,400 to Green which was subject to trade discount of 4% and early settlement discount of 5% if the invoice was paid within 7 days. The normal credit period available to credit customers is 30 days from invoice date. At the point of sale, Green was expected to take advantage of the early settlement discount terms offered. If, on this occasion, Green did not pay within the settlement discount period, what accounting entries should be made by ABC Co to record settlement of the amount outstanding?

• Debit Bank $1,400 Credit Receivables $1,400
• Debit Bank $1,344, Credit Receivables $1,276.80 and Credit Revenue $67.20
• Debit Bank $1,344 and Credit Receivables $1,344
• Debit Bank $1,276.80, and Credit Receivables $1,276.80

Answer explanation

Trade discount is always deducted and, in addition, as Green is expected to take account of the early settlement discount terms, the amount of revenue receivable is calculated after deduction of trade discount and early settlement discount, a total of $1,276.80 ($1,400 × 96% × 95%). When Green subsequently pays outside the settlement discount period, the full amount of $1,344 ($1,400 × 96%) is due and the additional amount received of $67.20 ($1,344.00 – $1,276.80) is accounted for as a cash sale. Debit Bank $1,344, and Credit Receivables $1,276.80 and Credit Revenue $67.20

ABC Co sold goods with a list price of $3,700 to White which was subject to trade discount of 5% and early settlement discount of 4% if the invoice was paid within 7 days. The normal credit period available to credit customers is 30 days from invoice date. At the point of sale, White was not expected to pay early and take advantage of the early settlement terms offered. If, as expected, White did not pay within the settlement discount period, what accounting entries should be made by ABC Co to record settlement of the amount outstanding?

• Debit Bank $3,515, and Credit Receivables $3,515
• Debit Bank $3,515, Credit Discount received $140.60 and Credit Receivables $3,374.40
• Debit Bank $3,374.40 and Credit Receivables $3,374.40
• Debit Bank $3,515, Debit Revenue $185 and Credit Receivables $3,700

Answer explanation

Trade discount is always deducted when calculating the amount invoiced by the seller. In addition, as White is not expected to take account of the early settlement discount terms, the amount of revenue receivable is calculated after deduction of trade discount only, a total of $3,515 ($3,700 × 95%). When White subsequently pays outside the settlement discount period as expected, the full amount of the receivable is due. Debit Bank $3,515, and Credit Receivables $3,515.