ICAEW AF · Chapter 4
Sales tax (VAT) MCQs with Answers
8 multiple-choice questions on Sales tax (VAT) for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business registered for VAT sells goods on credit for £2,400 plus VAT at 20%. What is the double entry to record the sale?
- A) Debit Trade receivables £2,880, Credit Revenue £2,400, Credit VAT £480
- B) Debit Trade receivables £2,400, Credit Revenue £2,400
- C) Debit Trade receivables £2,880, Debit VAT £480, Credit Revenue £3,360
- D) Debit Trade receivables £2,880, Credit Revenue £2,880
Show answer & explanation
Answer: A) Debit Trade receivables £2,880, Credit Revenue £2,400, Credit VAT £480
VAT = 20% x £2,400 = £480, so the customer owes £2,880. Revenue is recorded net of VAT at £2,400, because the VAT is collected on behalf of the tax authority. The £480 is credited to the VAT account as a liability (output tax).
Question 2
A VAT-registered business receives an invoice for £5,436, including VAT at 20%. How much of this amount is VAT?
- A) £755
- B) £4,530
- C) £906
- D) £1,087.20
Show answer & explanation
Answer: C) £906
When VAT is 20%, the gross amount is 120% of the net amount, so VAT = gross x 20/120 = gross x 1/6. VAT = £5,436 / 6 = £906 and the net amount is £4,530. Taking 20% of the gross figure (£1,087.20) is a common error because it applies the rate to an amount that already includes VAT.
Question 3
At the start of a quarter, a business owed £9,800 to the tax authority for VAT, which it paid during the quarter. In the quarter, output VAT on sales was £38,600 and input VAT on purchases was £21,450. What is the balance on the VAT account at the end of the quarter?
- A) £17,150 debit (receivable from the tax authority)
- B) £7,350 credit (payable to the tax authority)
- C) £17,150 credit (payable to the tax authority)
- D) £26,950 credit (payable to the tax authority)
Show answer & explanation
Answer: C) £17,150 credit (payable to the tax authority)
Opening liability £9,800 (credit) - payment £9,800 (debit) + output VAT £38,600 (credit) - input VAT £21,450 (debit) = £17,150. Output VAT exceeds input VAT, so the balance is a credit, a liability owed to the tax authority. Forgetting the payment would give £26,950.
Question 4
A VAT-registered business buys a machine for £18,000 plus VAT of £3,600. It also pays delivery of £500 plus VAT of £100. All the VAT is recoverable. At what amount should the machine be recorded as property, plant and equipment?
- A) £18,500
- B) £18,000
- C) £22,200
- D) £21,600
Show answer & explanation
Answer: A) £18,500
Recoverable VAT is not part of the cost of an asset because the business reclaims it from the tax authority; it is debited to the VAT account instead. IAS 16 includes delivery costs that are directly attributable to bringing the asset into use. Cost = £18,000 + £500 = £18,500.
Question 5
A business that is NOT registered for VAT buys inventory for £1,200 plus VAT of £240. At what amount should the purchase be recorded?
- A) £1,200, with £240 debited to a VAT account
- B) £1,440, because the VAT cannot be recovered and is part of the cost
- C) £960, because VAT is deducted from the invoice price
- D) £1,200, with £240 charged to sundry expenses
Show answer & explanation
Answer: B) £1,440, because the VAT cannot be recovered and is part of the cost
A business that is not VAT-registered cannot reclaim input VAT. The VAT is therefore a real cost and is included in the cost of the purchase: £1,200 + £240 = £1,440. Only registered businesses record a separate VAT account for recoverable input tax.
Question 6
The sales day book for the month shows total net sales of £37,100, VAT of £7,420 and gross total of £44,520. What entry is made in the VAT account when the day book is posted?
- A) Debit £7,420
- B) Debit £44,520
- C) Credit £7,420
- D) Credit £44,520
Show answer & explanation
Answer: C) Credit £7,420
The day book totals are posted as: debit trade receivables control £44,520, credit revenue £37,100, and credit VAT £7,420. Output VAT on sales is owed to the tax authority, so it is a credit (liability) entry in the VAT account.
Question 7
A VAT-registered business returns faulty goods to a credit supplier. The supplier's credit note is for £960, including VAT at 20%. What is the double entry to record the return?
- A) Debit Trade payables £960, Credit Purchase returns £800, Credit VAT £160
- B) Debit Purchase returns £800, Debit VAT £160, Credit Trade payables £960
- C) Debit Trade payables £960, Credit Purchase returns £960
- D) Debit Trade payables £960, Credit Purchase returns £768, Credit VAT £192
Show answer & explanation
Answer: A) Debit Trade payables £960, Credit Purchase returns £800, Credit VAT £160
VAT = £960 x 1/6 = £160, so the net amount is £800. The amount owed to the supplier falls by the full £960, so trade payables are debited. Purchase returns are credited with the net amount, and the input VAT originally claimed is reversed by crediting the VAT account with £160.
Question 8
In a VAT quarter, a business made sales of £126,000 excluding VAT. Of these, £18,000 were zero-rated and the remainder were standard-rated at 20%. It made purchases, all standard-rated, of £66,000 including VAT. How much VAT is payable to the tax authority for the quarter?
- A) £8,400
- B) £12,000
- C) £10,600
- D) £14,200
Show answer & explanation
Answer: C) £10,600
Output VAT = (£126,000 - £18,000) x 20% = £21,600; zero-rated sales are taxable at 0%. Input VAT = £66,000 x 1/6 = £11,000, because the purchases figure includes VAT. VAT payable = £21,600 - £11,000 = £10,600.