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Mr John,
please help me with thisMountain 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 included in Mountain’s receivables ledger for this transaction?
A $209,925
B $200,925
C $235,000
D $211,500ans is A. My understanding is: 200.000-20%=180.000+ST(17.5%) = 211.500. Since question doesn’t say about payment has made or not within 14 days, we firstly should include 211.500 in Receivables, and adjust discount later on if it is needed, which would leave 211.500-9000=202.500 in receivables. This is so confusing!
Sales tax is calculated after subtracting all discounts (whether or not they actually do pay early and get the early settlement discount – even if they do not pay early the sales tax is not re-calculated).
This is a tax rule (not an accounting rule) and although it was asked once in Paper F3 a long time ago, it is unlikely to be asked again (because it is a tax rules not an accounting rule).
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