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Hi get lost on this question from revision kit
2A sole trader’s business made a profit of $32,500 during the year ended 31 March 20X8.This figure
was after deducting $100 per week wages for himself. In addition, he put his home telephone bill
through the business books, amounting to $400 plus sales tax at 17.5%. He is registered for sales tax
and therefore has charged only the net amount to his statement of profit or loss and other
comprehensive income.
His capital at 1 April 20X7 was $6,500. What was his capital at 31 March 20X8?
A $33,730
B $33,800
C $38,930
D $39,000correct answer is C but i can’t understand what is the tax involvement in this
The tax involvement in the question is sometimes used to confuse the student and hence make them get a wrong answer..its just usual ACCA gimmicks lol..
saaabiiirr: the tax here is not a gimmick at all – it is important and is testing that you understand sales tax as well as the accounting equation.
He should not have put any of his home telephone through the company, and so he should be charged as drawings with the full amount of the bill including sales tax. Also none of the bill should appear in the Statement of profit or loss.
Accounting for Sales tax requires that sales tax should not appear in the statement of profit or loss account and other comprehensive income but will appear in the statement of financial position as either an asset(refund) or liability(tax payable). The question states that only the net tax amount was charged to the income statement. This means that 70 ,the only tax mentioned in the question , was charged, in this case excluded from the income statement. Not the whole 470 was expensed but only 400. So we conclude that the tax treatment was correct on the basis that home telephone bills were considered as a busiyness transaction. This implies that only the base amount of 400 affected profit while the tax of $70 had no effect on the profit figure of $32,500.
But since $ 400 wasn’t related to business activities and yet treated as an expense , we have to add it back to the profit figure to get $32,900 (32500+400) .
Bearing in mind that the treatment for wages amounting to $100/week is correct our adjusted profit will then be $32,500 as illustrated above.
The telephone bill(amounting to 470 i.e 400+17.5%x400) was a personal expense ,something outside business activities and it has to be treated as a drawing which will be shown in the balance sheet .
Therefore applying the formula : capital = capital at beginning of the year+net profit for the year-drawings
Capital as at 31 March 20X8 will be : 6,500+32,900-470= $ 38,930.
I hope you found this to be helpful. Good Luck!!!!
Counsel: Please do not answer in this forum because it is the Ask the Tutor Forum, and you are not the tutor (but please do by all means help people in the other F3 forum 🙂 )
Note taken John. I believe saaabiiirr shouldn’t have answered aswel? I didn’t know this forum was for tutors to answer only. Which forum from the menu is for students only?
Sorry – I shouldn’t have written that because this is not the Ask the Tutor Forum.
I got mistaken 🙂Ok thanks john. So its appropriate for me to answer right here? May you also moment on my answer
Hi
I have noticed that you have treated the wages paid to the owner as a deduction from profits. Shouldn’t it be treated as drawings?
Although the end effect will be the same to capital (add $100 to profits & less drawings $100), the logic is different.
Please confirm.Dear Mr. Moffat,
The question says
” He is registered for sales tax and therefore has charged only the net amount to his statement of..”
I believe means that he charged $400 to the P&L (Not $470 or $70) ?
Secondly 52 weeks @ $100/week his salary was $5,200.
Therefore, should his adjusted profit not be $38,100/=? (32,500+5,200+400)
Could you please clarify for me?
Regards
Mathews
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