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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Sales Taxes Mauldin Company makes sales on which a 5% sales tax is assessed. The following summary transactions were made during 2019:

  1. 1. sales for cash of $1,665,400, excluding sales taxes
  2. 2. sales on credit of $2,820,500, excluding sales taxes
  3. 3. sales taxes of $168,220 were paid to the state government during 2019

Required:

  1. 1. Prepare journal entries to record the preceding transactions.
  2. 2. Show how the unpaid sales taxes would be reported on Mauldin’s December 31, 2019, balance sheet.

1.

To determine

Prepare necessary entries to record the given transaction.

Explanation

Sales tax payable

The Company collects the tax from the customer when the sale is made in cash or an account, and periodically deposits the collections to the state’s department of revenue. Many states are implementing sales taxes on purchases made on the internet. Sales taxes are computed as percentage of the sales price.

Prepare journal entry to record the cash sales.

DateAccount Titles and explanationDebit ($)Credit ($)
Cash [$1,665,400×1.05]1,748,670 
      Sales 1,665,400
      Sales taxes  payable  83,270
 (To record the cash sales)  

Table (1)

  • Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $1,748,670.
  • Sales are component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales by $1,665,400.
  • Sales tax payable is a liability and is an increase in the value of liability. Hence, credit the sales tax payable by $83,270.

Prepare journal entry to record the credit sales of $2,820,500.

DateAccount Titles and explanationDebit ($)Credit ($)
Accounts  receivable [$2,820,500×1

2.

To determine

Show the effect of given transaction in the balance sheet of Company M as on December 31, 2019.

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