A-Z Construction Company was organized on May 1 of the current year. On May 2, A-Z Construction prepaid $18,480 to the city for taxes (license fees) for the next 12 months and debited the prepaid taxes account. A-Z Construction is also required to pay in January an annual tax (on property) for the current calendar year of $45,000.a. Journalize the two adjusting entries required to bring the accounts affected by the two taxes up to date as of December 31, the end of the current year.b. What is the amount of tax expense for the current year?

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Asked Dec 4, 2019
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A-Z Construction Company was organized on May 1 of the current year. On May 2, A-Z Construction prepaid $18,480 to the city for taxes (license fees) for the next 12 months and debited the prepaid taxes account. A-Z Construction is also required to pay in January an annual tax (on property) for the current calendar year of $45,000.
a. Journalize the two adjusting entries required to bring the accounts affected by the two taxes up to date as of December 31, the end of the current year.
b. What is the amount of tax expense for the current year?

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Expert Answer

Step 1

Adjusting entries:

 Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rule of Debit and Credit: 

Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

Step 2
  1. Prepare the adjusting entry for the two taxes at the end of the year:

An adjusting entry for prepaid tax

In this case, the business recognized the prepaid tax expired at the end of the year. So, the necessary adjusting entry that the business should record to recognize the tax expense is as follows:

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Post. Debit Credit Date Description Ref (S) (S) Тах еxpense (1) December 12,320 31 Prepaid tax (To record the tax expense incurred at the end of the year) 12,320

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Step 3

Working note:

 Calculate the value of tax expense at the end of the year

...

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(Number of months for Prepaid Taxes Таx ехpense%3D which tax expense are expired Number of months in a year ´$18,480 (8) 12 = S12,320 %3D

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