Smith Lots,Inc.,operates in a state where there is a 6% sales tax.If a customer pays cash for merchandise with a sales price of $500,what effect will this transaction have on Smith Lots' balance sheet? (Ignore the effect on cost of goods sold.)
A)Assets increase by $530,current liabilities increase by $30,and stockholders' equity increases by $500.
B)Assets increase by $500,and stockholders' equity increases by $500.
C)Assets increase by $500,long-term liabilities increase by $30,and stockholders' equity increases by $500.
D)Assets increase by $500,current liabilities increase by $30,and stockholders' equity increases by $470.
E)Assets increase by $530,long-term liabilities increase by $30,and stockholders' equity increases by $500.

Question

Quizplus · Accepted Answer

Smith Lots, Inc. receives $500 in cash from the customer, which increases the company's assets by $500. However, since the company is required to collect sales tax, it must add 6% of the sales price ($30) to its current liabilities as sales tax payable. This means current liabilities increase by $30. The stockholders' equity also increases by the amount of the sales price, as revenue is recognized. Therefore, assets increase by $500, current liabilities increase by $30, and stockholders' equity increases by $500, making option A the correct choice.