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# Sales Tax

Chapter-5

Chapter

SALES TAX

CHAPTER CONTENTS
Introduction Calculation of Sales Tax Double Entries Ledger Accounts of Sales Tax Practice Questions Answer Bank

## CFE College of Accountancy and Finance

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Sales Tax

Chapter-5

INTRODUCTION Sales Tax is the tax charged on goods and services sold This is also called VALUE ADDED TAX (VAT) Invoices show sales tax charged separately In the UK sales tax rate is 17.5% In the UK HM CUSTOM AND EXCISE Administers VAT If a business is tax registered then it must charge sales tax on its sales and must issue a VAT invoice For registered businesses tax is payable on goods sold and recoverable on goods purchased Tax charged on Sales is called OUTPUT TAX. This is credited in Sales tax account Tax charged on purchases is called INPUT TAX. This is debited in sales tax account Sales tax is recoverable on all assets for a business except for a Car. It is also recoverable on expenses except for entertainment expenses Every business has a unique VAT registration number which is to be shown on the invoice The TAX POINT on an invoice is the date when a transaction is going to be taken place for VAT purposes. Usually the tax point is the invoice date. In a question Figures can be in two forms: GROSS/INCLUSIVE: In a gross amount sales tax is included in the amount. In this case to calculate sales tax the formula applied is: Gross 17.5 = Sales Tax 117.5 NET/EXCLUSIVE: Tax is excluded from this amount. In this case to calculate sales tax: Net x 17.5% = Sales Tax ACTIVITY NO1 Gross amount is \$700.Calculate sales tax and net amount Net amount is \$500. Calculate sales tax and gross amount Gross amount is \$800. Calculate sales tax and net amount Gross amount is \$1000. Calculate sales tax and net amount Net amount is \$2000. Calculate sales tax and gross amount.

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Double Entries SALES: Dr. Debtors/Cash (gross) Cr. Sales (net) Cr. Sales Tax ON RECEIPT OF CASH FROM DEBTORS: (Gross amount) Dr. Bank Cr. Debtors PURCHASES: Dr. Purchases (Net) Dr. Sales Tax Cr. Creditors/Cash (gross) On Payment to creditors (Gross amount) Dr. Creditors Cr. Bank SALES RETURNS: Dr. Sales Returns (Net) Dr. Sales Tax Cr. Debtors (Gross) PURCHASES RETURNS: Dr. Creditors (Gross) Cr. Purchases returns (Net) Cr. Sales Tax ON RECEIPT OF MONEY FROM TAX Dr. Cash Cr. Sales Tax ON PAYMENT TO TAX Dr. Sales Tax Cr. Cash In case of Asset (Receivable) the entries in the Sales Tax account are as shown below. Sales Tax b/d X Cash Received Input Tax X Output Tax c/d In case of Liability (Payable) the entries in the Sales Tax account is as shown below. Sales Tax b/d Cash Paid Input tax c/d X X X Output Tax X X X X X
AUTHORITIES : AUTHORITIES :

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## MULTIPLE CHOICE QUESTIONS

1. A business sold goods to the value of \$500 (net) to Happy Ltd. What would be the debit to Happy Ltds account if sales tax is payable at a rate of 17.5%? A. B. C. D. 2. \$412.50 \$500.00 \$587.50 \$606.06

A summary of the transactions of Rimsha, who is registered for VAT at 17.5%, shows the following for the month of August 20X9. Output Inputs \$60,000 (exclusive of VAT) \$40,286 (inclusive of VAT)

At the beginning of the period Rimsha owed \$3,400 to Customs & Excise, and during the period he has paid \$2,600 to them. At the end of the period, the amount owing to Customs & Excise is: A. B. C. D. 3. \$3,700 \$3,930 \$4,400 \$5,300

A business sold goods with a net value of \$600 to Lucid plc. What entries are required to record this transaction if VAT is payable at 17.5%? Debit A. B. C. D. Lucid plc VAT Lucid plc Lucid plc Sales VAT Debit \$360 Credit \$360 Debit \$423 Credit \$423 \$ 600 105 705 600 600 105 Sales VAT Sales VAT Sales Lucid plc Credit \$ 705 105 600 105 600 705

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A sale is made for \$423 including VAT at 17.5%. What is the entry to the sales account? A. B. C. D.

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Cash of \$282 was received from a customer who had purchased goods on credit for \$240 plus VAT at 17.5%. What is the double entry for this receipt? Debit A. B. C. D. Cash Cash Cash Cash \$ 282 282 282 282 Sales VAT Sales Debtors VAT Debtors Credit \$ 240 42 282 240 42 282

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During a two-month period, a business made sales of \$69,200 plus VAT at 17.5%. The balance on the debtors account at the start of the period was \$5,329 and at the end of the period \$4,771. How much cash was received from debtors during the period? A. 468,642 B. \$69,758 C. \$80,752 D. \$81,868 Victoria sells materials to Fraser for \$240 plus VAT. Fraser manufactures goods and sells them to a customer, Helen, for \$360 plus VAT. Victoria and Fraser are VAT registered traders and the rate of VAT is 17.5%. How much VAT does each party pay to Customs and Excise? Victoria pays \$42 Fraser pays \$63 B. Fraser pays \$42 Helen pays \$63 C. Victoria pays \$42 Fraser pays \$21 D. Fraser pays \$42 Helen pays \$21 A business has an opening balance on the VAT account showing an amount owing to Customs and Excise of \$3,210. During the period there were standard rated outputs of \$12,400, excluding sales tax, and standard rated inputs of \$11,280, including sales tax. During the period \$2,890 was paid to Customs and Excise. The standard rate of VAT is 17.5%. What is the balance on the sales tax account at the end of the period? A. \$170 B. \$810 C. \$2,720 D. \$3,700 Charlie sells goods for \$1,200 and buys goods for \$810. Both transactions include sales tax at 17.5% in the prices given. How much Charlie will pays to the tax authorities in respect of these two transactions? A. \$58.09 B. \$68.25 C. \$178.72 D. \$210.00 On 01 February the balance on Jamess Sales tax account was \$2,400 credit. During the month, Sales tax on sales was \$1,050, sales tax on purchases and other expenses was \$900 and a repayment of Sales tax was received of \$200. What was the credit balance on the Sales tax account at 28th February? A. \$2,050 B. \$2,350 C. \$2,450 D. \$2,750 Output tax is the: A. VAT on purchase B. VAT on sales C. Payments to HM Customs and Excise D. Repayments from HM Customs and Excise A.

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A. \$577.50 B. \$700.00 C. \$822.50 D. \$848.48 Amna buys a shirt costing \$235, shoes for \$59.25 and a jacket costing \$70. These are all gross figures, inclusive of sales tax at 17.5%. How much sale tax has Amna paid? A. \$54.25 B. \$63.74 C. \$310 D. \$364.25 A summary of the transactions of Wisher & Co, which is registered for sales tax at 17.5%, shows the following for the month of November 20X4: Outputs \$122,610 (inclusive of sales tax) Inputs \$78,857 (exclusive of sales tax) At the beginning of the month, Wisher owed \$7,200 of sales tax and during November paid \$6,800. At 30 November 20X4 the amount of sales tax owing is; A. \$4,461 B. \$4,861 C. \$9,000 D. \$9,400 Sam Ltd purchased goods from a supplier for \$6,000 plus sales tax of \$1,050. Some of the goods are found to be faulty, and Sam returns one-third of them. The supplier issues a credit note. How should the credit note be recorded? Credit \$ A. Supplier account 2,000 Purchases returns B. Supplier account 2,350 Purchases returns C. Purchases returns 2,000 Supplier account D. Purchases returns 2,350 Supplier account The following totals appear on a page of the purchases day book. Debit \$ 2,000 2,350 2,000 2,350

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Total Purchases Sales tax \$ \$ \$ 5,657 4,865 792 The correct entry to record in the purchases account from the daybook is: A. Debit purchases \$4,865 B. Debit purchases \$5,657 C. Credit purchases \$4,865 D. Credit purchases \$5,657 Sellbridges Ltd, a retail store whose sales are all on cash terms and are all subject to VAT at the standard rate, receive cash takings from customers of \$60,720 in a particular week. How much VAT is due to Customs and Excise? A. \$5,520 B. \$6,072 C. \$9,043 D. \$10,626 During the first quarter of 19X9, a business had taxable outputs, net of VAT, of \$42,780 and taxable inputs, net of VAT, of \$30,360. All are subject to Vat at standard rate. At the end of the quarter, how much Vat is payable or recoverable from Customs and Excise?
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A. B. C. D. 26.

## \$2,174 payable \$2,174 recoverable \$1,850 payable \$1,850 recoverable

A business purchases machinery on credit for \$14,100, inclusive of VAT at the standard rate. What accounting entries are needed to reflect this transaction? Debit A. B. C. D. Machinery Machinery Machinery VAT Machinery VAT \$ 14,100 14,100 12,000 2,100 14,100 2,468 Creditors VAT Creditors Creditors Creditors Credit \$ 14,100 2,100 12,000 14,100 16,568

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A business purchases a motor car on credit for one of its salesman. The cost is \$9,200 plus VAT. What accounting entries are needed to reflect this transaction? Debit A. B. C. D. Motor cars Motor cars Motor cars VAT Motor cars \$ 9,200 10,810 9,200 1,610 10,810 Creditors Creditors Creditors Credit \$ 9,200 10,810 10,810

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VAT 1,610 Creditors 9,200 A business has an opening balance on the VAT account showing a debtor of \$590 and a closing balance also showing a debtor of \$460. During the period, there were standard rated outputs of \$4,200 and standard rated inputs of \$6,000 both exclusive of VAT. The standard rate of VAT is 17.5%. How much was the VAT repayment received from Customs and Excise during the period? A. \$185 B. \$445 C. \$1,365 D. \$1,930 Which of the following statements is correct? A. Output tax charged to a customer is debited to the VAT account. B. A machine is purchased for \$200 plus VAT \$35. The machinery account is debited with \$200 and the VAT account is debited with \$35. The VAT is irrecoverable. C. The VAT account has a debit balance of \$15,000 at the end of the VAT quarter, the balance is recoverable from the Customs and Excise. D. The sales figure in the profit and loss account of a VAT registered business includes VAT. A VAT registered business sells goods of \$1,200 plus \$210 VAT and purchases goods costing \$200 plus VAT \$35. Assuming these are the only transactions in the VAT period and that input tax is fully recoverable, how much VAT is due/payable to/from Customs and Excise? A. VAT payable \$175 B. VAT recoverable \$175 C. VAT payable \$210 D. VAT payable \$245 Laker Ltd returned goods that had a net value of \$200. What entries are required to record this transaction if sales tax is payable at 17.5%? Debit Credit
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A. B. C. D. 32.

Returns inward Sales tax Returns inwards Purchases Sales tax Laker Ltd

## \$ 235 35 200 235

Returns inwards 200 Sales tax 35 Shahid is a sales tax registered accountant and returned office computer equipment to a supplier, as it was faulty. What double entry will Shahid record in his accounting records? A Dr Trade Payables Cr Equipment Cr Sales tax B. Dr equipment Dr sales tax Cr Trade payable C. Dr Trade Payables Dr Sales tax Cr Purchases D. Dr Trade Payables Dr Sales tax Cr Equipment Waqar purchase daybook shows net purchases of \$3,500. What double entry will he post? A B C D Dr Purchases Dr Trade payables Dr Purchases Dr Trade payables Dr Sales tax Dr Sales tax Cr Trade payables Dr Sales tax Cr Trade payable Cr Purchases Cr Sales tax Cr Bank

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Green House Limited is a manufacturing company, buys materials costing \$5,200, machinery costing \$3,416 and office equipment costing \$1,340. It also sells goods for \$5,200. These transactions are all inclusive of sales tax at 17.5% What is the total input sales tax, which the business has paid? A. B. C. D. \$967.84 \$1.742.30 \$708.34 \$1,482.8 Dr Sales Tax Dr Sales tax Dr Purchases Dr Trade Payable Dr Purchases Dr Trade Payables Cr Trade Payables Cr Purchase returns Cr Trade Payables Cr Purchases Cr Sales tax Cr Sales tax

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What double entry would a sales tax registered trader record for the returns of goods to supplier? A B C D

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Sadia has a sales tax credit balance of \$1,500 at the start of trading. She then purchases goods on credit for \$1,500 net, makes a cash sale of \$705 and pays a supplier an outstanding debt of \$1,692 (sales tax is levied at 17.5%) What is Sadias sales tax balance after these transactions? A. B. C. D. \$1,090,50 credit \$1,2375 credit \$1,342.50 credit \$987 credit Net Price \$ 3,240 2,640 740 Sales tax \$ 567 462 130

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Pantheon buys goods during December as follows: Dec 4 From Reed Dec 13 From Manish Dec 26 From Pinkerton

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What are the correct entries in Pantheons general ledger? A Dr. Trade payables \$7,779 Cr Purchases \$6,620 B Dr. Trade payables \$8,808 Cr. Purchases \$7,649 C Dr. Purchases \$7,649 Dr. Sales tax \$1,159 D Dr. Purchases \$6,620 Dr. Sales tax \$1,159

Cr Sales Tax \$1,159 Cr. Sales Tax \$1,1559 Cr. Trade payables \$8,808 Cr Trade payables \$7,779

## ANSWERS TO MULTIPLE CHOICE QUESTIONS

Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Answers C D B B D D C B A D B B C C A C C C B Questions 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Answers A B B A C A C B B C A A A A D D C D

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