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Please i’d like to know how to go about this question?
Jim sells goods on credit to John. John receives a 10% trade discount from Jim and a further 5% settlement
discount if goods are paid for within 14 days. John bought goods with a list price of $480,000 from Jim. Sales
tax is at 17.5%.??The tax is calculate after accounting for all discounts (even though the settlement discount may in fact not be given because they take more than 15 days to pay).
So…..List price is 480,000. Trade discount is 10%, which brings the price down to 432,000.
The settlement discount is 5% of 432,000 which brings the price down to 410,400The tax is calculated on this figure and is therefore 410,400 x 17.5% = 71,820
Even if the customer takes longer than 14 days to pay (and therefore does not get the settlement discount) the sales tax remains at 71,820.
(It may seem odd, but that is how it works. To stop people ‘cheating’ the discount must be a commercial discount (so offering a discount of say 50% would obviously be cheating). Also, since it will usually only be relevant when a business is selling to another business, the tax people will not lose out because the tax charged by the selling company is reclaimed by the buying company).
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