ExpertMedium2 marksMultiple Choice
ACCA · Question 04 · The use of double-entry and accounting systems
Section A
AgriGrow Ltd sells specialized farming equipment. A customer purchases a tractor for $55,200, which is inclusive of a 15% sales tax.
What is the correct double entry to record this cash sale in AgriGrow Ltd's books?
Section A
AgriGrow Ltd sells specialized farming equipment. A customer purchases a tractor for $55,200, which is inclusive of a 15% sales tax.
What is the correct double entry to record this cash sale in AgriGrow Ltd's books?
Answer options:
A.
Debit Cash $55,200; Credit Sales $55,200
B.
Debit Cash $55,200; Credit Sales $46,920; Credit Sales Tax Account $8,280
C.
Debit Cash $55,200; Credit Sales $48,000; Credit Sales Tax Account $7,200
D.
Debit Sales $48,000; Debit Sales Tax Account $7,200; Credit Cash $55,200
How to approach this question
Recognize that the $55,200 represents 115% of the sale value. Divide by 1.15 to find the net sales figure, and the difference is the tax liability.
Full Answer
C.Debit Cash $55,200; Credit Sales $48,000; Credit Sales Tax Account $7,200✓ Correct
The cash received is the gross amount ($55,200). This represents 115% (100% sale + 15% tax). Net sales = $55,200 / 1.15 = $48,000. Sales tax = $55,200 - $48,000 = $7,200. The entry is Dr Cash (Gross), Cr Sales (Net), Cr Sales Tax (Tax).
Common mistakes
Calculating the tax by multiplying the gross amount by 15% (i.e., $55,200 * 0.15 = $8,280). This is mathematically incorrect.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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