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Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement discount if goods are paid for within 14 days. Hill bought goods with a list price of $200 000 from Mountain. Sales tax is at 17.5%. What amount should be incl in Mountain’s receivables ledger for this transaction?
The answer is given as:
List price (200000) – trade discount (20000) = 180000
Then they calculate the sales tax to be added as 17.5%X95%X 180000 = 29925
Then they add the sales tax to the 180000 and not to the net amount which the customer pays, i.e 95% of 180000.
Does this make sense to anyone out there??
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dear according to my knowlegde firstly
200000*10/100 = 20000
Remaining amount = 2000000-20000
=180000
further discount= 180000*5/100 = 9000
net amount = 180000-9000 = 171000
sale tax 17.5% = 171000*17.5/100
sale tax = 29925
Shahbaz iqbalQuote:Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement discount if goods are paid for within 14 days. Hill bought goods with a list price of $200 000 from Mountain. Sales tax is at 17.5%. What amount should be incl in Mountain’s receivables ledger for this transaction?Charlien, firstly you will assume all the discounts to be availled for the purpose of sales tax calculation.
It would be: $200,000 – ($200,000 x 10%) = $180,000
Then $180,000 – ($180,000 x 5%) = $171,000
Then sales tax would be: $171,000 x 17.5% = $29,925But in receivables, Mountain will show $180,000 + $29,925 = $209,925
The journal entry would be:
Dr. Receivables [sales price including sales tax (gross selling price) $209,925
Cr. Sales [sales price excluding sales tax (net selling price)] $180,000
Cr. Sales tax $29,925• The sales account does not include sales tax because it is not income – it will have to be paid to the tax authorities.
• The receivables account does include sales tax, as the customer must pay the full amount due.
HTH
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the GTG textbook states that sales tax should be calculated after deducting the trade discount.Then the sales tax should be added to that value & cash discount to be calculated on that. eg- list price is 1000, trade discount 10% ,sales tax 17% & cash discount 5%…………………..1000-(10% * 1000) =900 then 900* 17.5%= 153..then (900 + 153 = 1053.cash discount will be 1053-(1053 *5%)=1000.35…………..I am confused if sales tax should be calculated after deducting cash discounts or before that??what would be the receivables amt?? pls help me out!!
Hi Guys,
In simple terms Sales tax is caculated after all discounts including settlement. This is to be prudent and not overstate/understate the asset(receivable). Therefore sales tax will be calculated on the Cost Price less 10% les 5% settlement discount which is equal to 171000. 17.5% tax on this is = 29925. So in total to the receivables we post:
Cost: 171000
Sales Tax: 29925
Settlement Discount: 9000 (As we don’t know if they will receive this yet)
In total this equals 209925
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