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hi, I am stuck on the below question, can someone please help.
A business sells goods for $2,000 plus 15% sales tax, and offers a 2% settlement discount for payment within 20 days. A) How much will the invoice total amount be, and B)how much will the purchaser pay in total if he decides to take the discount?
A) Invoice amount wont include any settlement tax because we not 100% sure of if purchaser will pay within 20 days..
Original cost of good= $2000
Sales Tax= 15%
therefore
0.15*$2000=$300
Total cost of good incl sales tax= $2000+$300=$2300invoice amount= $2300
But the answer is $2294 and I dont understand why?
Part B is fine… I think.. my working is below.
If purchaser decides to take the discount of 2% that means that I will allow for the settlement discount first.
0.02*2000= 40
2000-40=1960 *New Price of good*Now apply the sales tax of 15%
0.15*1960=294.00
1960+294.00=2254so 2254 is how much the purchaser would pay if he decided to take the discount.
This is going to sound strange, but in the UK the rule is that the sales tax is calculated after subtracting the settlement discount.
And even if they do not pay on time (and do not therefore get the discount) the sales tax is not recalculated.
(The reason is that most times it will be sales to other companies and then it doesn’t matter because the tax the selling company pays to the state is the same that the buying company gets back from the state. The only rule the tax people have is that the discount offered must be commercial (so if they were offering a discount of (say) 20% then it would be obviously trying to cheat).)
However, because it is a tax rule (and this is not a tax exam) it would be unfair for it to be asked in the real exam.
Hi John!
Thanks for your reply!
I understand the tax law.. thanks for explaining.. but can you help me understand how part a is $2294? I am still confused I cant see how $2294 is the answer? So are you saying for part A- that the invoice amount.. will include a settlement discount..irrespective of whether it is taken or not ? Please help. Thanks
The invoice will be for the full amount of 2,000 (ignoring the discount – they only get the discount later if they do pay early) plus sales tax of 294 (the sales tax is calculated on the amount less the discount – whether or not they actually get the discount).
Could you please help me with accounting entries for this question.
How company DR/CR when they issue invoice with sale tax of 294?
And if customer does not pay within the settlement discount period, which DR/CR entries will be recorded? (As now sale tax is understated, so I guest we have to make adjustment entries)
Could you please help me with accounting entries for this question.
How company DR/CR when they issue invoice with sale tax of 294? (I mean how they disclose a sale tax of 294 on the book?)
And if customer does not pay within the settlement discount period, which DR/CR entries will be recorded? (As now sale tax is understated, so I guest we have to make adjustment entries)
If you want me to answer then you should ask in the Ask the Tutor Forum – this forum is for students to help each other.
The entries for sales tax are all explained in my free lectures.
Sales tax is not re-calculated if the customer does not pay within the period – see my previous answers!!
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