Question

Rancco Inc. reported total sales of $73,000,000 last year. Of this amount, $13,000,000 was exempt from sales taxes leaving $60,000,000 in sales that were subject to sales tax. The sales tax rate is 5%. You are a loan officer reviewing a loan application from the company that includes financial statements. You notice that Rancco, Inc. had sales tax payments amounting to $2,000,000 over the same period of time. What are your concerns about this discrepancy? How might you verify the discrepancy?

Answer 1

Answer-

Total sales	$73,000,000
Less: Sales exempt from sales tax	$13,000,000
Sales eligible for sale tax	$60,000,000
Sales tax ($60,000,000*50/100)	$3,000,000
Less: Sales tax payments as per books	$2,000,000
Difference in sales tax that should be payable	$1,000,000

There is a shortage in tax payments by $1,000,000 that is not reflecting a true and fair value of financial statement of Rancco and will increase the value of profit after taxes.

Discrepencies can be verified with the management in the organization.