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Tangerine Co made a sale to a credit customer for $500 plus sales tax at 40% which was recorded correctly in the general ledger. The customer subsequently returned half of the goods as they were damaged upon receipt and a credit note was issued for that amount. The entry for the credit note in the receivables account was made correctly and the other entry was made for the same amount in the returns inwards account. What journal adjustment should Tangerine Co make to correct this error?
A Dr Returns inwards $50, and Cr Sales tax $50
B Dr Sales tax $50, and Cr Returns inwards $50
C Dr Sales tax $100, and Cr Returns inwards $100
D Dr Returns inwards $100, and Cr Sales tax $100
Answer in the Book is B. I am not convinced with the answer in the book. I believe the answer should be C. Please kindly explain this sir.For the question as you have typed it, none of the answers are correct.
I think that you have either copied the question wrongly (or that there is a typing error in your book) and that the sales tax is 20% and not 40%.
Then the correct answer is indeed B.
When the sales was made, the entry is to Dr Receivables 600, Cr Sales 500, Cr Sales tax 100.
When half are returned, the correct entry would be Cr Receivables 300, Dr Returns inwards 250, Dr Sales tax 50.
They have Dr Returns inwards with 300, and therefore to correct it they should Cr Returns inwards with 50 and Dr Sales tax 50.
Entries of Sales
Dr Receivable 700
Cr Sales tax 200
Cr Sales 500
Entries of Sales Return (Error)
Dr Return Inwards 350
Cr Receivable 350
Entries of Sales Return (Correction of Error)
Dr Sales tax 100
Cr Return Inwards 100 (350-250)
The sales tax is 40% and if no change is made to the question, I believe the answer will be option C. Please confirm sir.
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