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cpa2010
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Posted: 22 Jul 2010 at 07:04 \| IP Logged

On July 1, 1993, Ran County issued realty tax assessments for its fiscal year ended June 30, 1994. On September 1, 1993, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real estate tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, 1993, Day paid the first of two equal installments of $12,000 for realty taxes. What amount of this payment should Day record as a debit to real estate taxes payable?

a. $4,000

b. $8,000

c. $10,000

d. $12,000

ans is b .I saw the same postin the forum but could not understand the explanation....pls help and explain in simple words..thanks a lot in advance

1tryCPA
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Joined: 27 Jun 2010
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Posted: 22 Jul 2010 at 08:37 \| IP Logged

I'm doing those problems as following:

tax year 7/1/93 - 6/30/94
Payment on 11/1/93 12,000 covers tax period of 7/1/93- 12/31/93.
On 11/1/93, 4 months already passed, so those are documented expenses and paid by reducing Taxes payable account. 2 mo - we are prepaying for them - increase in prepaid tax

Tax Payable 4x2,000 = 8,000
Prepaid tax 2x2,000 = 4,000
       Cash 12,000

If I do this way, I always get correct answer, but I don't understand by myself why in each similar problem they mention purchase of some property.

The info about not recording the whole amount at the beginning means that monthly entries were

Tax expense 2,000
    Tax payable 2,000
for the first 4 months.

For the next 2 months, entries would be

Tax expense 2,000
    Prepaid tax 2,000

Hope it helps

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cpa2010
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Posted: 22 Jul 2010 at 15:20 \| IP Logged

Sorry to ask but i'm still confused as to y 2m is considered prepaid ..it relates to the same yr ...right .....correct me where m i goin wrong

1tryCPA
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Joined: 27 Jun 2010
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Posted: 22 Jul 2010 at 15:34 \| IP Logged

The question asks about entries to do on Nov 1, not 12/31.
On Nov1, (2) months of Nov and Dec are prepaids. You cannot document them as expense with offset to A/P.

If the question asks about the balance of prepaid account related to those taxes on 12/31, then it would be 0.

__________________
FAR - 07/09/10 - {95}
AUD - 10/02/10 - {96}
BEC - 11/29/10 - {92}
REG - 05/23/11 - {75 would be enough}90 unbelievable, and I AM DONE!!!
______________
Wiley book/Gleim CD/Gleim simulations

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