Question

Use the information provided below, for Siyeza Traders for the financial year ended
28 February 20.8, to answer questions 1 to 3.
Siyeza Traders is an enterprise that sell motor vehicles in the ordinary course of business at a
mark-up of 45% on cost. During the current financial period, Siyeza Traders sold eight motor
vehicles for a cash price of R80 000 each (15% VAT inclusive). Round your answer off to the
nearest Rand.

1. Income earned from the sale of motor vehicles will be classified under ... in the statement
of profit or loss and other comprehensive income.
(1) Other income
(2) Profit on sale of motor vehicle
(3) Revenue
(4) Gains
(5) Finance income

2. Income earned from the sale of motor vehicles will be disclosed in the statement of profit
or loss and other comprehensive income as an amount of … .
(1) R640 000
(2) R441 379
(3) R544 000
(4) R556 520
(5) R352 000

3. Which of the following statement is correct?
(1) VAT on cash sales will be debited to the VAT output account.
(2) VAT on cash sales will be debited to the VAT input account.
(3) VAT on cash sales will be credited to the VAT output account.
(4) VAT on cash sales will be credited to the VAT input account.
(5) VAT output account will be transferred to the debit side of the VAT control account.

Answer 1

	Given,
	Markup on cost	45%
	Number of vehicles sold	8
	Price (15% VAT inclusive)	R80000

1)

Income earned from the sale of motor vehicles will be classified under "Revenue" (Option 3) in the statement of profit or loss and other comprehensive income. This is because Siyeza Traders is an enterprise that sell motor vehicles and this represents transactions which was done in the ordinary course of business (i.e. operating activity).

2) Income earned from the sale of motor vehicles will be disclosed in the statement of profit or loss and other comprehensive income as an amount of R556,520 (Option 4).
Explaination: Revenue doesnot include VAT as it is collected on the behalf of third party and doesnot represent an economic benefit flowing to an enterprise. Therefore in this case as R80,000 per vehicles is inclusive of VAT so the same should be segregated between amount to be credited in Income earned from the sale of motor vehicles (Revenue account) and Output VAT account. In this case let the selling price exclusive of VAT be R100 so VAT would be R100*15%= R15 and selling price inclusive of VAT would be R115. As R80000 represents total price therefore price per vehicle to be credited in Income earned from the sale of motor vehicles account would be R(80000/115)*100= R69565 and as the enterprise has sold 8 vehicles so the total would be R(69565*8)=R556520.

3) The statement "VAT on cash sales will be credited to VAT output account" (Option 3) is correct. This is because when we make sale we pass journal entry as Cash/debtors (debit with the total amount of sale including the VAT amount) and credit sales account (with the price excluding VAT) and Output VAT account (since the VAT is charged on sale so it represents output VAT). As it is credited in this journal entry so the same would be posted in the credit side of VAT output account.
Option 2&4 are incorrect as VAT on cash sales are always posted to output VAT account and not in input VAT account (this account is used in case of purchases).Option 1 is incorrect-already explained via journal entry above
Option 5 is incorrect because output VAT is transferred to credit side of VAT control account as it represents liability of the business as it denotes amount collected from customers that needs to be paid to government authorities.