Question on Sales Tax?

[Tang Tony]

Why is the sales tax deducted for the cash discount? The question didn't state that the customer received the discount. Here's the question:

Mountain sells goods on credit to Hill. Hill receives a 10% trade discount from Mountain and a further 5% settlement
discount if goods are paid for within 14 days. Hill bought goods with a list price of $200,000 from Mountain. Sales
tax is at 17.5%.
What amount should be included in Mountain’s receivables ledger for this transaction?
A $235,000
B $211,500
C $200,925
D $209,925

The answer is D and the explanation given is as follows:
List Price =200,000
Trade discount =(20,000)
=180,000
Sales tax (17.5%*95%*180,000) =29,925
=209,925

So why is cash discount deducted from sales tax?

[pauljaco]

Hi Tang,

Im only new to this revision and all i know is that trade discounts are not allowed as they are adjusted in the transaction value. The cash discount of 5% however is allowed as it will be show as an expense on the SOCI. The question does state that there is a discount and a further 5% settlement
discount if goods are paid for within 14 days

Hope this helps

Paul

[aira]

the reason is...trade discount is allowed to customer at the time of tranasction bt cash discount is allowed when he makes payment..so it should be deducted from price at the time of payment bt for the sales tax purpose only we assume that the customer has taken the discount...dats y we calculate 17.5% on 171000(excluding cash discount) while gross price is 209925(including cash discount)