Question

A company sells $ 180,000 (sales price) of goods and collects sales tax of 8%. What current liability does the sale create?

A. Sales tax payable of $ 14, 400
B. Sales revenue of $ 194, 400
C. Unearned revenue of $ 14, 400
D. None; the company collected cash up front.

Answer 1

The sale creates a current liability of sales tax payable of $14,400, which is calculated by multiplying the sales amount by the sales tax rate of 8%.

Step-by-step explanation:

The correct answer to the student's question is: A. Sales tax payable of $14,400. When a company sells goods, the amount of sales tax it collects needs to be reported as a current liability on the balance sheet, because this is not the company's income.

It is a tax collected on behalf of the government, and it will need to be paid to the government authorities later. To calculate the sales tax payable, you multiply the sales amount by the sales tax rate. In this case, the calculation would be $180,000 (sales price) × 0.08 (8% sales tax) = $14,400.