Question

Smith Corporation purchases merchandize on account from a supplier on June 30, 2016 for $4,000 plus GST (5%). On July 5, merchandize is sold for $5,000 plus GST to Customer A on account. Assume that the perpetual inventory method is used.

Required:

1. Prepare the journal entry to record the $4,000 purchase from the supplier.(7 marks )

2. Prepare the journal entry to record the sale to Customer A. (7 marks )

3. Prepare the journal entry to record payment of GST on these two transactions to the Government of Canada on July 31. (8 marks )

4. How much GST expense will Smith Corporation report on its income statement for these two transactions? (8 marks )

Descriptions and general ledger account numbers are not necessary for

journal entries.

Answer 1

1. Prepare the journal entry to record the $4,000 purchase from the supplier

Date	Account	Debit($)	Credit($)
June 30, 2016	Inventory	4000
	GST Recoverable(4000x5%)	200
	Accounts Payable		4200

2. Prepare the journal entry to record the sale to Customer A

Date	Account	Debit($)	Credit($)
July 5, 2016	Customer A	5250
	Sales		5000
	GST Payable(5000x5%)		250
July 5, 2016	Cost of goods sold	4000
	Inventory		4000

3. Prepare the journal entry to record payment of GST on these two transactions to the Government of Canada on July 31.

Date	Account	Debit($)	Credit($)
July 31, 2016	GST Payable	250
	GST Recoverable		200
	Cash		50

4. How much GST expense will Smith Corporation report on its income statement for these two transactions?

Smith Corporation will report the net of the GST Payable i.e. 250 and GST Recoverable i.e. 200 as GST expense on its income statement, which is USD 50