The agreed cost of an item to be purchased by a business on credit is $4,000. The applicable cost will be debited to advertising expense. The item is subject to 5% goods and services tax (GST) and 7% provincial sales tax (PST). When this transaction is recorded, what amount will be debited to advertising expense?

Question

Quizplus · Accepted Answer

The cost of the item is $4,000. 
GST at 5% = $200 (calculation: 5% of $4,000) 
PST at 7% = $280 (calculation: 7% of ($4,000 + $200)) 
Total cost of the item including taxes = $4,480 (calculation: $4,000 + $200 + $280) 
Since the applicable cost including taxes is debited to advertising expense, the amount debited to advertising expense will be $4,480.

The Agreed Cost of an Item to Be Purchased by a Business