Question
Riverbend Traders is registered for VAT at 15%. VAT on its purchases is recoverable, except VAT on client entertainment, which the tax law does not allow it to reclaim. June 2026:
| Date | Event (amounts exclude VAT unless stated) |
|---|
| June 3 | Sold goods on account for $80,000 plus VAT. |
| June 8 | Bought inventory on account for $50,000 plus VAT. |
| June 12 | Bought office equipment for $20,000 plus VAT, paid in cash. |
| June 20 | A customer returned goods from the June 3 sale; credit note for $4,000 plus VAT. |
| June 24 | Paid $2,000 plus VAT in cash for client entertainment. |
| June 30 | Filed the VAT return for June and paid the amount due in cash. |
Ignore cost of goods sold.
Required:
- Journal Entries — all six transactions. Use Accounts Receivable, Sales Revenue, VAT Payable (output VAT), Inventory, VAT Receivable (input VAT), Accounts Payable, Equipment, Cash, Sales Returns and Allowances and Entertainment Expense.
- VAT Paid — the amount paid to the tax authority on June 30.
- Statement Impact — the effect of the June 3 sale.
Statements in this challenge
- Journal EntriesJournal Entry
- VAT PaidNumeric Answer
- Statement ImpactStatement Impact
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories; IFRS 15 — Revenue from Contracts with Customers
Work each transaction from the perspective stated in the question: the same shipment is a purchase to one party and a sale to the other, and the entries are not mirror images because only the seller recognises revenue and cost of sales. Read the credit terms and the freight terms before writing anything.
Common mistakes
- Ignoring the shipping terms — they decide who owns goods in transit and who bears the freight.
- Applying a settlement discount to the gross invoice when returns have already reduced the amount owed.
- Confusing a trade discount, which never enters the records, with a settlement discount, which does.
Further readingIAS 2: costing methods and NRV