Chapter 1, Problem 14AP

To determine

Compute VAT for each Corporations.

Explanation of Solution

VAT: Value-Added-Tax (VAT) is a kind of tax that is levied on the incremental value of the goods under process in any stage of production.

In this it is required to find out the value added to the entertainment videos by each of the Incorporation and compute the VAT on those value.

Calculate the value added by Incorporation Q and the VAT on it, as follows;

$\begin{array}{l}\text{Value addded by Incorporation Q = Sales revenue-Cost of sales}\\ =\left[\begin{array}{l}\$111,600,000\left(\$9\times 12.4\text{m units}\right)\\ -\$74,400,000\left(\$6\times 12.4\text{m units}\right)\end{array}\right]\\ =\$37,200,000\end{array}$

$\begin{array}{l}\text{VAT = Value addded by Incorporation Q}\times \text{Tax rate}\\ \text{= \$37,200,000}\times \text{3\%}\\ \text{=\$1,116,000}\end{array}$

Calculate the value added by Incorporation R and VAT on it, as follows;

$\begin{array}{l}\text{Value addded by Incorporation R = Sales revenue-Cost of sales}\\ =\left[\begin{array}{l}\$124,000,000\left(\$10\times 12.4\text{m units}\right)\\ -\$111,600,000\left(\$9\times 12.4\text{m units}\right)\end{array}\right]\\ =\$12,400,000\end{array}$

$\begin{array}{l}\text{VAT = Value addded by Incorporation Q}\times \text{Tax rate}\\ \text{= \$12,400,000}\times \text{3\%}\\ \text{=\$372,000}\end{array}$

Therefore, the VAT for Incorporation Q and Incorporation R is $1,116,000 and $372,000 respectively.