Question

The following selected transactions relate to liabilities of Interstate Farm Implements for December of 2018. Interstate’s fiscal year ends on December 31.

Required:
Prepare the appropriate journal entries for these transactions.
1. On December 15, received $7,500 from Bradley Farms toward the purchase of a $98,000 tractor to be delivered on January 6, 2019.
2. During December, received $25,500 of refundable deposits relating to containers used to transport equipment parts.
3. During December, credit sales totaled $800,000. The state sales tax rate is 5% and the local sales tax rate is 2%. (This is a summary journal entry for the many individual sales transactions for the period.)

Answer 1

1. Recording revenue received in advance:

Date	Account Title and explanation	Debit ($)	Credit ($)
December 15, 2018	Cash A/c	7,500
	Deferred Revenue A/c		7,500
	(To $7,500 received in advance against tractor sold which will be delivered next year)

Cash A/c is debited as per rule 'debit what comes in'. Referred revenue is a liability as revenue is received in advance before service is delivered. An increase in liability is credited.

2. Recording refundable deposits:

Date	Account Title and explanation	Debit ($)	Credit ($)
December 31, 2018	Cash A/c	25,500
	Refundable deposit A/c		25,500
	(To $25,500 received as refundable deposit)

Cash A/c is debited as per rule 'debit what comes in'. Refundable deposit is a liability it is expected to be paid back by the company after specified period. An increase in liability is credited.

3. Recording credit sales and sales tax:

Date	Account Title and explanation	Debit ($)	Credit ($)
December 31, 2018	Accounts Receivables A/c	856,000
	Sales revenue A/c		800,000
	Sales Tax Payable A/c		56,000
	(To record credit sales and sales tax payable)

Credit sales raises accounts receivables which is an asset and an increase in asset is debited. Sales revenue increases equity and increase in equity is credited. Sales tax payable is also a liability that needs to be credited.

Calculation of sales tax:

Sales tax payable includes both state and local sales tax that amounts to 7% of 800,000 = $56,000