Question

Kathy's Corner Store has total cash sales for the month of $35,000 excluding sales taxes. If the sales tax rate is 6%, which journal entry is needed? (Ignore Cost of Goods Sold.)

a. debit Cash $35,000 and credit Sales Revenue $35,000
b. debit Cash $36, 050, credit Sales Revenue $35,000 and credit Sales Tax Payable $1, 050
c. debit Cash $33, 950, debit Sales Tax Receivable for $1, 050 and credit Sales Revenue for $35,000
d. debit Cash $36, 050, credit Sales Revenue $36, 050

Answer 1

none of the answers is correct, the correct answer should be:

• Dr Cash 37,100
• Cr Sales Revenue 35,000
• Cr Sales Tax Payable 2,100

Step-by-step explanation:

If Kathy sold $35,000 during the month and the sales tax is 6%, then she will have collected $37,100 in cash.

$35,000 belong to her as sales revenue and $2,100 (= $35,000 x 6%) is money she owes as sales taxes.

Since cash is an asset, when it increases it must be debited.

When revenue increases, it must be credited.

Sales tax payable is a liability, when it increases it must be credited.

Dr Cash 37,100 (= 35,000 + 2,100)

Cr Sales Revenue 35,000 (net revenue)

Cr Sales Tax Payable 2,100 (= 35,000 x 6%)