Question

Sales Tax Transactions

Illustrate the effects on the accounts and financial statements of recording the following selected transactions. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases, cash outflows, and the cost of merchandise sold as negative amounts.

a. Sold $11,250 of merchandise on account, subject to a sales tax of 6%. The cost of the merchandise sold was $6,750.

   
Statement of Cash Flows   Balance Sheet   Income Statement
Assets   =   Liabilities   +   Stockholders' Equity
Accounts Receivable
+  
Inventory
=  
Sales Tax Payable
+     
Retained Earnings
   
   
   
      

Statement of Cash Flows      Income Statement
No effect

0
   
Sales

-6,750
   
Cost of goods sold

   
Net income

b. Paid $63,120 to the state sales tax department for taxes collected.

   
Statement of Cash Flows   Balance Sheet   Income Statement
Assets   =   Liabilities   +   Stockholders' Equity
Cash
+  
No Effect
=  
Sales Tax Payable
+     
No Effect
   
   
0
   
      
0

Statement of Cash Flows      Income Statement
Operating

   
No effect

0
   
No effect

0
   
No effect

0

Answer 1

Answer to Part (a)
Scenario 1: Considering Sales inclusive of tax
Tax amount= (Total Sales Value/100+tax%)*Tax%
	11250/106*6
	636.8
Scenario 2: Considering Sales exclusive of tax
Tax Amount= Total Sales Value* tax%
	11250*6%
	675
Journal entries
Scenario 1:
	Sales A/c	Dr.	11250
	Inventory A/c	Cr.	6750
	Profit & loss A/c	Cr.	3863.2
	Sales Tax Payable A/c	Cr.	636.8
	(Being goods sold and sales tax charged @6%)
Scenerio 2:
	Sales A/c	Dr.	11925
	Inventory A/c	Cr.	6750
	Profit & loss A/c	Cr.	4500
	Sales Tax Payable A/c	Cr.	675
	(Being goods sold and sales tax charged @6%)
	Particulars	Impact
	Account Receivables A/c	11250/11925
	Cash A/c	No Impact
	Inventory A/c	-6750
	Sales Tax Payable A/c	+ 636.8/675
	Retained earnings	+3863.2/4500

Answer to part (b)
	Journal entry
	Sales Tax Payable A/c	Dr.	63120
	Cash A/c	Cr.	63120
	(Being cash paid to Tax authority)
	Particular	Impact
	Sales Tax Payable A/c	-63120
	Cash A/c	-63120