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ACCA Applied Knowledge · Financial Accounting · Sales and purchases

Halden Co is registered for sales tax. It buys goods for $4,800 including sales tax at 20%, then returns goods with a gross value of $1,200 to the supplier and receives a credit note. What is the correct entry for the return?

Payables are debited $1,200, purchase returns credited $1,000 and the sales tax account credited $200. The return reverses the original purchase, so the input tax previously claimed on the returned goods must be reduced.

  1. ADr Payables $1,200; Cr Purchase returns $1,200
  2. BDr Payables $1,200; Cr Purchase returns $1,000; Cr Sales tax $200Correct
  3. CDr Payables $1,000; Cr Purchase returns $1,000
  4. DDr Payables $1,200; Cr Purchase returns $960; Cr Sales tax $240

Explanation

Gross $1,200 divided by 1.2 gives net $1,000 and tax $200. Payables are reduced by the gross amount, purchase returns credited with net, and the previously recoverable input tax is reduced by crediting the sales tax account $200. Option D takes 20% of gross.

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