Recording Liabilities at the Point of Sales Why The law often requires companies

Question

Recording Liabilities at the Point of Sales Why The law often requires companies to collect taxes from customers and remit them to a tax- ing authority. Upon collection, these represent liabilities until they are paid. Information: During the first quarter of 2014, McLean County Tire sold, on credit, 3,000 truck tires at $75 each plus State of Illinois sales tax of 7% and City of Bloomington municipal taxes of 1%. These taxes are paid to the appropriate taxing authority each quarter. Required: Prepare the journal entry to record (1) first quarter sales and (2) payment of taxes to the appropriate taxing authority.

Explanation / Answer

S.No.

Accounts Title & Explanation

Debit

Credit

(1).

Accounts receivable

$243000

     Sales revenue (3000 * $75)

$225000

     State sales tax payable ($225000 * 0.07)

$15750

     Municipal tax payable ($225000 * 0.1)

$2250

(For recording sale on account including taxes)

(2).

State sales tax payable

$15750

     Cash

$15750

(For recording payment of state sales tax)

Municipal tax payable

$2250

     Cash

$2250

(For recording payment of municipal tax)

S.No.

Accounts Title & Explanation

Debit

Credit

(1).

Accounts receivable

$243000

     Sales revenue (3000 * $75)

$225000

     State sales tax payable ($225000 * 0.07)

$15750

     Municipal tax payable ($225000 * 0.1)

$2250

(For recording sale on account including taxes)

(2).

State sales tax payable

$15750

     Cash

$15750

(For recording payment of state sales tax)

Municipal tax payable

$2250

     Cash

$2250

(For recording payment of municipal tax)

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