Question

Task Two: LO2 Ayman Co, a manufacturing firm, purchases raw material at a cost of BHD5,600 plus VAT at the standard rate of 5%. From the raw materials Ayman Co makes finished products which it sells to retail outlet, Reema Co, for BHD6,800 plus VAT at 5%. Reema Co sells the products to customers at a total price of BHD8,400 plus VAT at 5%. Required: A. Calculate the amount of VAT paid at each stage of the chain. B. Prepare the accounting journal entries for VAT from Ayman Co's Standpoint. C. Advise Ayman Co on whether the VAT is payable or receivable and the exact implications of that to Ayman Co.

Answer 1

A

Particulars	Amount	Government
Purchase:
Vat paid	280	280
Sale to reema:
Vat payable	340
Less: vat paid on inputs	-280
Net vat liability to government	60	60
Reema sale to customer:
Vat payable	420
Less: vat paid on inputs	-340
Net vat liability to government	80	80
Total		420

As shown above total vat payable together by various parties to government is 420.

B

Account	Debit	Credit
Inventory	5600
Input vat credit	280
Cash		5880
(purchase of material)
Cash/ Accounts receivable	7140
Sales revenue		6800
Vat payable		340
(entry for sales)
Vat payable	340
Input vat credit		280
Cash		60
(discharge of vat liability)

C
When vatable goods are purchased then vat paid on them is a kind of receivable.

When vatable goods are sold then vat is charged and collected from customers. Such collected amount is reduced by the vat credit or receivable on vatable purchases already paid and balance is paid to government.

Please rate.