ACC1000 Chapter Notes - Chapter 4: Interest Expense, Bank Statement, Accounting Equation

90 views5 pages

taupewoodchuck955

6 Jun 2018

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Chapter 4 The Goods and Services Tax (GST)

The business that sells the good/ service must charge and collect from the customer the selling price plus an

amount for GST. The GST amount is then transferred to the ATO by the business at a later date. When a

business charges its customers GST, GST on sales creates a liability – an amount of GST owned to the ATO. If

the business has been charged any GST by its suppliers, it is allowed to deduct this GST on purchases from

its GST liability. The GST on its purchases will be forwarded to the ATO by the firm’s suppliers, so it is treated

as if the business had actually paid the GST straight to the government.

Goods and Services Tax (GST):

a 10% tax levied by the federal government on most purchases of goods

(excluding fresh good) and services

Recording GST

All transactions involving GST are recorded in a new ledger account called ‘GST Clearing’, which can either

be a current liability or a current asset.

GST liability:

Because selling prices are usually higher than cost prices, in most cases the GST on sales will be

greater than the GST on purchases, so the business will have a current liability in relation to GST. This means

that, the business will owe GST to the ATO, which it will pay when it makes a GST settlement. (GST payable)

GST asset:

If the business makes a bulk order of stock(which it has not sold) or purchases an expensive non-

current asset, then its GST on purchases could be greater than its GST on sales, so the business will have a

current asset in relation to GST. This means the business will be owed GST by the ATO, which it will receive

in the form of a GST refund. (GST receivable)

4.2 Source Document

Source documents have in common one essential quality: they provide the evidence, or proof, that a

transaction has occurred, and provide the facts and details on which all subsequent accounting information

will be based.

Source document:

printed or electronic documents that provide both evidence that a transaction has

occurred, and the details of the transaction itself.

Because source documents provide the evidence of the details of every transaction, they are integral in

ensuring that accounting reports contain information that is reliable, or free from errors, bias and subjectivity.

Source documents also provide verifiable evidence for transactions- Historical cost principle.

Source documents and the GST

Because of the GST, source documents must include the following information:

n The words “tax invoice” stated clearly

n The name of the seller

n The Australian Business Number (ABN) of the seller

n The date of the transaction

n A description of the good/ service provided

n The price of the transaction, including the GST

n The amount of the GST

Calculating GST

In its simplest form,

GST

is calculated as

10% of

the

selling price

, and

added to the selling price to determine

the total price.

Cash Inflows and Cash Receipts:

When cash is received, the business will issue a

cash receip

t to the customer,

and keep a copy of the receipt for its own records.

Regardless of the type of receipt issued, it should contain all the information necessary to account for the

GST, plus a receipt number for easy identification and verification.

Cash receipts:

a source document used to verify cash received.

Cash sales and the GST

At the time a cash sale is made, the business will receive the cash for the goods, plus the GST on the sale,

and this must be documented on a cash receipt. The GST does not affect the sales revenue earned, or the

cost of the stock sold; instead, it is an additional amount collected on behalf of the ATO.

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Cash receipts should include:

n The words “tax invoice”

n The date of the transaction

n The receipt number

n The name and ABN of the seller

n A description of what has been sold

n The selling price inclusive of the GST. This is the amount of cash received.

n The amount of the GST

Identifying sales revenue

The amount of sales revenue can be calculated by deducting the GST from the total amount received(Bank/

debtors)

Recording a cash sale with GST

The cross-reference in the Bank account refers to both

Sales

and

GST Clearing

, because the cash received

consists of part sales and part GST. The entry on the credit side of the GST Clearing account shows the liability

owed to the ATO for the tax collected by the business, which the business must forward to the ATO at some

tie in the future.

Effect on the accounting equation

Other cash inflows

Cash receipts should be issued every time cash is received, whether it is for a cash sale, a receipt from a

debtor, a c a p i ta l c o n t r i b u t i o n o r s o m e o t h e r so u r c e . T h e only exceptions are when cash is deposited directly

into the business’s bank account, in this case the source document might be the bank statement.

The reason for the receipt refers to ‘

settlement of account

’, indicating that the cash has been received from

a debtor to settle the account outstanding. It is also important to identify the name of the debtor from whom

the cash is received.

There is no GST to account for when cash is received from a debtor, because the GST is recognized and

reported only at the time sale are made. In fact, a receipt from a debtor is just one of the cash inflows that

is not subject to GST, with others including:

n Interest revenue

n Capital contribution

n Loans

Recording of GST:

GST collected (or charged) on sales,

n GST Clearing (CL) INCREASES, Cr GST CLEARING

GST paid (or incurred) on purchases on expenses,

n GST Clearing (CL) DECREASES, Dr GST CLEARING

Cash Outflows and Cheque Butts

The main benefits of paying by Cheque include:

n Security – paying by avoids the risks of carrying large sums of cash, and the danger of theft this

entails

n Traceability – cheques must be deposited into a bank account, meaning it is possible to trace the

eventual recipient of the funds

n Verifiability – all payments made by Cheque are recorded on the Cheque butt, providing a source

document to verify the transaction

As the Cheque itself is given as payment, it is the

Cheque butt

that will be retained by the business as

evidence of the cash it has paid. Even if a Cheque is cancelled, the Cheque butt should still be completed to

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Chapter 4 the goods and services tax (gst) The business that sells the good/ service must charge and collect from the customer the selling price plus an amount for gst. The gst amount is then transferred to the ato by the business at a later date. When a business charges its customers gst, gst on sales creates a liability an amount of gst owned to the ato. If the business has been charged any gst by its suppliers, it is allowed to deduct this gst on purchases from its gst liability. The gst on its purchases will be forwarded to the ato by the firm"s suppliers, so it is treated as if the business had actually paid the gst straight to the government. Goods and services tax (gst): a 10% tax levied by the federal government on most purchases of goods (excluding fresh good) and services.

Related Questions

Case Study Background

Assume that Brisbane Divers (ABN 34 255 712444) operates as a partnership and you and your groupmembers are the owners of that company. Brisbane Divers specializesin selling locally manufactured diving equipment and takes studentson diving courses in its boat. The business charges GST on allinventory sales and dive lessons and pays GST on inventorypurchases and most business expenses.

Employees

Brisbane Divers employs two casual assistants. Julia Hiltonworks as a dive instructor on the boat, and Peter Ball works in theshop selling stock, and taking bookings for dive lessons. Eachemployee works between 20 to 30 hours per week, depending on theseason and demand. Payday is every second Saturday. The followinginformation is used to calculate their wages:

Page 1 of 7

Name	Role	Gross pay- Per hour ($)	PAYG tax Per hour ($)
Julia Hilton	Dive instructor	25	6
Peter Ball	Shop assistant	20	5

At the end of July, Brisbane Divers owed 4 hours pay toboth Peter and Julia.

Note: Do not use the employee section of MYOB,record the wages expense and tax as a cash payment.
Goods and Services Tax
All transactions which incur GST are identified, the GST is 10%

Goods and Services Tax:

Brisbane Divers pays GST of 10% on all business expenses, exceptWages.

Merchandise Inventory:

The following is a list of closing inventory and the suppliersas at July 31 2018.

Each of the above items of inventory is quoted excludingGST.

Restocking inventory.

The required inventory is purchased on credit under the terms ofpayment required by the suppliers.

Your group members have a good relationship with each of thesuppliers once your company places an order, the suppliers willdeliver them free of charge the same day.

Lessons:

A part of Brisbane Diversâ income is earned from conductingdiving lessons.

The lessons are quoted excluding GST.
Lessons revenue must be recorded separatelyfrom sales.

Quantity on hand	Item Code	Description	Cost Price	Sale Price	Supplier
23	DMS	Diving Masks	$130	$250	Scuba Gear Ltd.
24	EPS	Exposure Protection Suits	$150	$280	Planet Dives Ltd
38	SNO	Snorkel	$10	$20	SeaWorld Ltd

Item Code	Lesson Type	Fee Course
DL	Diving lessons	$150

Suppliers account balances as at July 31, 2018:

Name	Address	ABN	Account Balance
Planet Dives Ltd.	400 Sydney Road, Wingy	30 444 777 333	$944
Scuba Gear Ltd.	11, Tide Towers Williamsville.	20 888 555 222	$1280
SeaWorld Ltd.	79 Rountree road, Spotswood	92 000 333 666	$2330

Each of the above account balances represents deliveries ofinventory received on July 28th all purchases are on terms net 30days.

Customer Information:

Brisbane Divers sells most of its inventory strictly on a cashbasis, but the business has three credit customers. Terms ofpayment for these customers are net 30 days.

Name	Address	ABN	Date Last Invoice	Account Balance
Swimmers World	13 Colombo Street, , VIC 3292	50 999 555 666	July 26	$2 350
Brisbane Academy	47 Bloomy Road, , VIC 3292	92 555 888 111	July 19	$1 940
Westley Academy	33 Departure Drive VIC 4000	20 888 444 999	July 13	$4 400

Trial Balance as at July 31, 2018

Ledger Account	Debit ($)	Credit ($)
Bank	16 096
Stationery	2 500
Prepaid Insurance	3 000
Merchandise Inventory	6 970
Trade Debtors	8 690
Trade Creditors		4 554
Motor Vehicle	22 500
Accumulated Depreciation of Motor Vehicle.		6 850
Diving Equipment and Boat	38 900
Accumulated Depreciation of Dive Equip & Boat		11 230
Shop Fittings	5 750
Accumulated Depreciation of Shop Fittings		575
GST Collected		4 198
GST Paid	2 837
Capital		53 000
Loan - ANZ Bank, William Street.		25 500
PAYG Tax Payable		540
Wages Payable		136
Electricity Payable		660
	$107 243	$107 243

Transactions: August 2018

Date	Description
1	Paid rent for 2(two) months - $4,400 (GST Inclusive). [chq90]
3	Paid Cash for vehicle expenses- $275 â (GST Inclusive) [chq91]
3	Paid Scuba Gear Ltd. for July account. [chq 93]
4	Received payment from Swimmers World for July account.
4	Purchased more inventory 25 x DMS, 20 x EPS, 25 x SNO
4	Cash sales: Inventory sold: 10 x DMS, 6 x EPS, 20 x SNO
4	Paid electricity bill for July $ 660(including GST) [chq 94]


5	Five cash customers paid for diving course. ($150+ GST eachperson). The course commences on August 8 (since the service will beprovided within August, consider this as cash sales for Augustdirectly. No need to record as unearned.)
7	Paid SeaWorld Ltd. for July account. [chq 95]
7	Paid advertising in the Williamsville Times - $275(GSTInclusive) [chq 96]
8	Sales Invoice sent to Swimmers World for the following items: 15x DMS, 18 x SNO
9	Pay day. Julia was paid for 30 hours and Peter was paid for 22hours, which includes wages owing from July [chq 97 and 98]
12	Received payment from Brisbane Academy World for Julyaccount.
14	Cash sales: Inventory sold: 10 x DMS, 12 EPS
16	Cash drawings â Cheque payable to one of your groupmembers$5000[chq 99]
16	Paid Planet Dives Ltd. for July accounts. [chq 100]
19	10 cash customers paid for diving course. ($150+GST eachperson).( The course commences on 20th of August)
21	Received payment from Westley Academy for July account
23	Paid monthly repayment to ANZ for bank loan. $500 (includes $50 interest). GST is not payable on thistransaction. [ chq 101]
23	Pay day. Peter was paid for 20 hours and Julia was paid for 25hours. [chq 102 and 103]
25	Paid Electricity for August - $880 (GST Inclusive) [chq 104]
29	Swimmers World paid for items purchased on August 8.
31	Paid Telephone Expenses for August $660 (including GST) [chq105]

Adjustments at 31 August 2018

Depreciation of motor vehicle 20 % per annum at cost.

Depreciation of diving equipment and boat $6000 per annum.

Depreciation of Shop Fittings 10 % per annum at written downvalue.

Accruedwages:Peterâ28hourandJulia22hours.

Accrued Cleaning expenses for August $ 1100(including GST). Atax invoice has been

received.

Stationery on hand at 31 August 2018 totaled $ 1590.

The portion of prepaid insurance expired as of 31 August 2018 is$2,500.

Water bill for August is unpaid and unrecorded $750 Plus GST. Atax invoice has been

received.

Part A: Manual Recording

IMPORTANT: Part A ManualRecording

Required:

Record the opening balances as at 1 August 2018 in theappropriate general ledger accounts.

Record August monthâs transactions in the general journal andpost these to the generalledger.

Record end of month adjustments in the general journal and postthese to the general ledger.

Prepare a Trial Balance after end of month adjustments as at 31August 2018

PrepareanIncomeStatementforAugust2018andaBalanceSheetasat31August2018.

Part B: Computerised accounts using MYOB

1.Enterthebusinessinformation,establishachartofaccounts,recordsupplierandcustomerbalances, enter inventory balances and record opening ledgeraccount balances as at 1 August 2018.

2. Record the transactions, including the adjusting entries, forthe month of August 2018.

3. Produce Trial Balance as at August 31st, 2018 (after alladjustments). (This MUST be directly printed from MYOB).

4. Produce Transaction Journal from 1 August to 31 August forall transactions. (This MUST be directly printed from MYOB).

5. Produce Income Statement for month ended August 2018 (ThisMUST be directly printed from MYOB).

6. Produce Balance Sheet as at 31st August 2018 (This MUST bedirectly printed from MYOB).

apricotherring182

During the current year, Marlene, Nancy and Olive formed a new SCorporation. Solely in exchange for stock, Marlene and Nancycontributed appreciated property, while Olive contributed services.The exchanges of Marlene and Nancy will be nontaxable if:

		Olive receives 30% of the stock
		Olive receives 80% of the stock
		Olive receives 15% of the stock
		Marlene and Nancy together receive 50% of the stock

In June of 2018, Alice acquired heronly machine for $30,000 to use in her business. The machine isclassified as 5-year property. Aliceâs maximum depreciation(including bonus) on the machine this year is:

		$30,000
		$12,000
		$6,000
		$18,000

Cactus Corporation, an S Corporation, had accumulated earningsand profits of $200,000 at the beginning of the tax year. Tex andShirley each own 50% of the stock. During the current year Cactushad $100,000 of ordinary income and distributed $10,000 to Tex and$10,000 to Shirley. What is Tex's taxable income for the currentyear?

		$10,000
		$0
		$100,000
		$50,000

Bristol Corporation was formed as an S Corporation on January 1,2014 and elected S corporation status at that date. Bristol has hadthe same 25 shareholders throughout its existence and has one classof stock. Bristol's S election will terminate if it:

		10% of the shareholders vote to revoke the election
		to purchase 10 shares
		Allows a variation in the voting rights of the stock
		Increases the number of shareholders to 125

On February 10, 2018, Ace Corporation, a new calendar yearcorporation, elected S corporation status and all shareholdersconsented to the election. There was no change in its shareholdersduring the current year. Ace met all eligibility requirements foran S corporation during the preelection portion of the year. Whatis the earliest date on which Ace can be recognized as an Scorporation?

		February 10, 2018
		January 1, 2019
		February 10, 2019
		January 1, 2018

In March of 2017 Frederick acquired an passenger automobile for$45,000 and used the automobile 85% for business. Themaximum depreciation deduction for 2017 is:

		$3,160
		$11,160
		$8,928
		$9,486

In August of 2017, Joseph acquires andplaces into services business equipment costing $300,000. Theequipment is classified as 5-year recovery property. No otheracquisitions are made during the year. Joseph elects to expense themaximum amount under Sec. 179. Josephâs total deductions for theyear are

		$60,000
		$500,000
		$100,000
		$300,000

For the current tax year, VBN, an S Corporation distributes$100,000 to its sole shareholder, Raymond. His basis in the stockwas $140,000 before the distribution. VBN had once been a regular CCorporation and had remaining accumulated earnings and profits(E&P) from those years of $70,000. However, VBN has no balancein its accumulated adjustment account. How should the distributionof $100,000 be handled?

$100,000 as a taxable distribution

$70,000 as a taxable dividend, and $30,000 has a non taxablereturn of capital

$50,000 as a taxable dividend, and $100,000 as a non taxablereturn of capital

$70,000 as a taxable dividend; and $30,000 as a capital gain

Stahl, an individual who owns 100% of Talon, an S corporation,had a basis of $50,000 at the first of the year. During the yearTalon reported the following: Ordinary Loss of $10,000; Municipalinterest income of $8,000, Long term capital gain of $4,000; andLong term capital loss of $9,000. What was Stahl's basis in Talonat year end?

		$56,000
		$65,000
		$53,000
		$43,000

Gross Receipts of $70,000; Tax Exempt Interest Income of $4,000;Dividends of $10,000; Supplies Expense of $3,000; and UtilitiesExpense of $1,500. What amount is the S Corporation's ordinarytaxable income?

		$75,500
		$79,500
		$70,000
		$65,500

Bob and Sam each owned 50% of Lostalot, an S Corporation. Bob'sbasis is $30,000 and Sam's basis is $15,000. The corporation hasoperating loss for the current year of $50,000. Howmuch loss can each shareholder deduct in the current year assumingthey materially participate in the business:

		Bob: $25,000; Sam: $15,000
		Bob: $0; Sam: $0
		Bob: $25,000; Sam: $25,000
		Bob: $30,000; Sam: $15,000

Terra Corporation, a calendar-yeartaxpayer, purchases and places into service in 2017 machinery witha 7-year life that cost $650,000. The mid-quarter convention doesnot apply. Terraâs taxable income for the year before the Sec. 179deduction is $700,000. What is Terraâs total maximum depreciationdeduction related to this property?

		$585,718
		$521,345
		$92,885
		$500,000

Identify which of the following statements is false.

		The PTI (previously taxed income) represents the balance ofundistributed net income which were already taxed.
		The AAA balance can be negative, but the shareholder's basis inthe S corporation stock cannot be less than zero.
		Tax exempt income increase the AAA and the basis of the Scorporation stock.
		An S Corporation may or may not have accumulated Earnings andProfits Elaine owns an unincorporated manufacturing business. In 2017,she purchases and places in service $600,000 of qualifying fiveyear equipment for use in her business. Her taxable income from thebusiness before any section 179 deduction is $100,000. Which of thefollowing statements is true?

Elaine cannot deduct any Section 179 deduction for 2017

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $400,000 carryover to next year.

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $500,000 carryover to the next year

Elaine can deduct $500,000 as a section 179 deduction in2017

Charles, an individual, owned 100% of the Alpha, an Scorporation. At the first of the year, Charles' basis in Alpha was$25,000. In the current year, Alpha realized ordinary income of$1,000; and a long term capital gain of $3,000. Alpha distributed$25,000 to Charles at the end of the year. What amount of the$25,000 is taxable to Charles?

		$0
		$7,000
		$1,000
		$25,000

Case 15-2 Burying the Hatchet Mighty Mufflers Corp. (MMC)manufactures exhaust systems that automakers use in the productionof new vehicles. Competition in this market has waned in recentyears. Many competitors exited the business in the economicdownturn and few have returned because of the capital-intensivenature of the manufacturing process. In 20X1, the Department ofJustice (DOJ) launched an investigation involving MMC and twoadditional auto parts suppliers, alleging anticompetitive behaviorinvolving price collusion between suppliers. Shortly after the DOJinvestigation commenced, a number of customers formed aclass-action lawsuit against the three suppliers, alleging that thesuppliers fixed prices and overcharged customers as a result ofthese anticompetitive behaviors. Certain entities opted out of theclass-action lawsuit and separately undertook legal action againstthe individual suppliers, including MMC. These entities areexisting customers of MMC. In 20X2, MMC reached a settlement (theâFirst Settlementâ) with several of those entities that opted outof the class action lawsuit (the âPlaintiffsâ). The terms of theFirst Settlement provide that MMC will pay the Plaintiffs paymentsof: â¢ $20 million â consisting of $10 million due in 20X3 and $10million due in 20X4. â¢ $10 million â structured in the form of avolume incentive payment whereby the Plaintiffs, as a group, willreceive a 5 percent rebate on their purchases during 20X3 in anamount not to exceed $10 million. All payments are paid to the lawfirm representing the Plaintiffs, which disburses the funds at itsdiscretion. MMC believes it is reasonably assured the Plaintiffs,as a group, will earn the maximum $10 million volume incentivepayment, since the sales volume required is only a fraction of thePlaintiffsâ annual purchasing. Further, if the Plaintiffs, as agroup, do not achieve the maximum $10 million incentive payment asa result of any action of MMC (e.g., plant closure, inventoryshortage), then the full $10 million will be deemed to be earned bythe Plaintiffs. Finally, a separate amount (the âTrue-Up Paymentâ)will be payable from MMC to the Plaintiffs, or vice versa,depending on the settlement (the âSecond Settlementâ) MMC reacheswith the remaining entities that opted out of the class-actionlawsuit but were not party to the First Settlement. This amount,and whether it is owed by MMC or the Plaintiffs, will be determinedbased a formula applied to the Second Settlement amount and iscapped at $5 million. Required: 1. How much should MMC accrue forthe First Settlement as of December 20X2? 2. How should MMCclassify the debit resulting from accrual of the First Settlementin the statement of income? 3. How should MMC account for theTrue-Up Payment as of December 20X2?

Can someone tell me which ASC sections areinvolved?

There is a posted solution:

1. How much should MMC accrue for the First Settlement as ofDecember 20X2? Amount Accured for the first settlement = $10million + $10Millionx (1-5%) = $10,000,000 + 9,500,000 =$19,500,000

2. It will treat as an expenses,will be added to the concernedexpense and it will be treated as current liability.

3. True up Payment = $10,000,000 - $9,500,000 = $500,000,

But this doesn't explain where the backup for thesecalculations came from.

ultramarinegerbil13

ACC1000 Chapter Notes - Chapter 4: Interest Expense, Bank Statement, Accounting Equation

Document Summary

Get access

Related Documents

ACC1000 Lecture Notes - Lecture 1: Going Concern, Accrual, Basis Of Accounting

ACC1000 Study Guide - Final Guide: A Question Of Balance, Current Asset, Capital Account

ACC1000 Chapter Notes - Chapter 2: Current Liability, Balance Sheet, Accounting Equation

Related Questions