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A 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 $39,000Capital at 1 April 20X7 6,500
Add: profit (after drawings) 32,500
Less: sales tax element (70)
Capital at 31 March 20X8 38,930The correct answer is C
This is just simple answer that I got from the book.However, I don’t understand this answer completely. Could you please explain this?
It is. using the accounting equation which is explained in my free lectures.
Increase in capital = profit + capital introduced – drawings.
The profit (after adding back the wages and the telephone) is 32,500 + 5,200 + 400 = 38,100.
The drawings are (52 x $100) + (400 + 17.5%) = 5,670.
There is no capital introduced.Therefore the increase in capital = 38,100 – 5,670 = 32,430.
The capital at the start of the year was 6,500, therefore the capital at the end of the year is 32,430 + 6,500 = 38,930.
Have you watched my free lectures? The are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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I did not get why you don’t consider 70 when you calculate profit and then deduct 70 ? Confusing.
70 is the sales tax on the telephone bill (17.5% x 400).
The question says that the net amount (i.e. 400) has been charged to the SOPL. It should not have been charged because it is a private telephone bill.
The total cash paid was the full 470 (including sales tax). It was paid by the business, but because it was private telephone it is drawings.
Again, have you watched my free lectures (particularly those on sales tax)?
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