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Adjusting entries for prepaid and accrued taxes 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 previous calendar year. The estimated amount of the property tax for the current year (May 1 to December 31) is $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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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 3, Problem 17E
Textbook Problem
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Adjusting entries for prepaid and accrued taxes

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 previous calendar year. The estimated amount of the property tax for the current year (May 1 to December 31) is $45,000.

  1. 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.
  2. B. What is the amount of tax expense for the current year?

A.

To determine

Prepare the adjusting entry for the two taxes at the end of the year.

Explanation of Solution

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.

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:

DateDescription

Post.

Ref

Debit

($)

Credit

($)

December 31Tax expense (1)   12,320 
           Prepaid tax  12,320
 (To record the tax  expense incurred at the end of the year)   

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets-$12,320}=Liabilities+{Owners'equity-$12,320}

Working note (1):

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

Taxexpense=(PrepaidTaxesNumberofmonthsinayear

B.

To determine

Determine the amount of tax expense of the business for the current year.

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Chapter 3 Solutions

Financial And Managerial Accounting
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