Question

15. Which one of the following is not an expense of the business in the current period? a) Sales taxes collected from customers and paid by the seller to the government tax office An estimate of the costs of a 2-year warranty provided to customers who have purchased goods in the current period c) Amounts owing to employees (but not yet paid) for work performed this period d) None of the above (all are expenses)

what is answer for this question and why b cannot be the answer? i need an explanation to understand this question.

Thank you

Answer 1

Correct answer is Option a.

Sales tax collected from customers is recorded as liabilities when it is collected as it is payable to the Government. When it is paid to the Government, the liability is debited. There is no effect on income statement for sales tax collected and paid to the Government as it is not an expense.

Option b is the estimate of warranty cost. Warranty is the obligation for the business as they have to repaid the goods which are returned defective in the warranty period. As per matching concept, the expenses incurred for the income earned during the year are to be charged in income statement in the same year. Therefore, the warranty expenses are to be provided in the current year on estimated basis. Journal entry for this will be warranty expenses account is debited and provision for warranty is credited. It is an expenses for the current period.