17.5 % Sales tax — OpenTuition Forums

Ccharlien15y ago

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??

Former user15y ago#1

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 iqbal

SShunmas15y ago#2

@charlien

Quote:

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% = $29,925

But 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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Former user15y ago#4

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!!

Rro1sin15y ago#5

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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