[Lily Juell]

A state requires quarterly sales tax returns to be filed with the sales tax bureau by the 20th day following the end of the calendar quarter. However, the state further requires that sales taxes collected be remitted to the sales tax bureau by the 20th day of the month following any month such collections exceed $500. These payments can be taken as credits on the quarterly sales tax return.

Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state sales tax, which Taft collects and records as sales revenue. The sales taxes paid by Taft are charged against sales revenue. Taft pays the sales taxes when they are due.

Following is a monthly summary appearing in Taft’s first quarter 1989 sales revenue account:

Debit Credit

January $ – $10,600

February 600 7,420

March – 9,540

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$600 $27,560

In its financial statements for the quarter ended March 31, 1989, Taft’s sales revenue and sales taxes payable would be:

Ans:

Sales Sales taxes

Revenue ; payable

$26,000 $960

Solution:

26,000 times Sales tax rate .06

equals Sales tax collected 1,560

Less advance payments 600

Sales tax payable $ 960

My question is, how are we supposed to know that the $600 was an advance payment? I assumed the $600 was a return since it’s shown as a debit to the sales revenue account and I deducted it from sales initially. So frustrating….

[Anonymous]

The $600 was an advance payment because it says the returns are filed quarterly, but if their monthly liability is over $500 they remit it the month after it is collected.

[lab2008]

It's funny I'm working on this same problem and I understand the question above about the $600 debit is a payment.. but what I don't get is why we divide credits to sales revenue by 1.06 to get sales revenue. Anyone have a way of explaining? Thanks!

Credits to sale revenue divided by Sales tax rate plus 1 = Sales revenue

$27,560/1.06 = 26,000

3 out of 4 passed and sitting for FAR on May 31. Will lose credit for Audit if I don't pass FAR by Aug 4. I love leases and bonds.

[Anonymous]

If you buy something for $1 with 6% sales tax, you pay $1.06, right? However, the actual revenue that the company got was $1, the $0.06 was a sales tax liability. To back it out and get the actual sales revenue, you have to divide by 1.06 because that's the factor that you multiply by to get the total sale (customer owes 100% of the sales amount plus 6% tax, or 106% of the sales amount, which is a multiplication factor of 1.06 – make sense?). At least in KY, this is the way the actual sales tax return form is calculated – you list total receipts, then anything not subject to tax, then net receipts subject to tax, and from there you divide by 1.06 to get net sales subject to tax and multiply by .06 to get sales tax.

[lab2008]

Thanks Lilla – that explanation helps. I knew it was probably something simple but with all the other concepts I'm trying to cram into my head today, it didn't compute 🙂

3 out of 4 passed and sitting for FAR on May 31. Will lose credit for Audit if I don't pass FAR by Aug 4. I love leases and bonds.

[Author]

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