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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Property Taxes Family Practice Associates has an estimated property tax liability of $7,200 assessed as of January 1,2019, for the year May 1, 2019, to April 30, 2020. The property tax is paid on September 1, 2019. The property tax becomes a lien against the property on May 1.

Required:

  1. 1. Prepare the necessary monthly journal entries to record the preceding information for the period from May 1 to September 30, 2019 (assuming actual taxes are the same as estimated).
  2. 2. What would be the amount of the liability on December 31, 2019?

1.

To determine

Prepare the journal entries to record the transactions in the books of Company FPA.

Explanation

Property Taxes:

The taxes which are imposed by municipal or state government on a property that a company owns are called as property taxes.

Prepare the journal entry to recognize the property tax expenses at May 31 through August 31, 2019 (4 month entries).

DateAccount titles and explanationDebit ($)Credit($)
Property tax expenses (1)600 
     Property taxes payable 600
 (To record the property tax expenses of the month)  

Table (1)

Working note (1):

Calculate the property tax expense per month:

Property tax expense per month = Estimated property tax liability of the year12months=$7,20012months=$600

  • Property tax expenses are an expense account and it decreases the value of stockholders’ equity. Thus, debit property tax expense account with $600.
  • Property tax payable is a liability account and it is increased. Thus, credit property tax payable with $600.

Prepare the journal entry to record the payment of property tax on September 1, 2019.

DateAccount titles and explanationDebit ($)Credit($)
September 1, 2019Property taxes payable2,400 
 Prepaid property taxes (2)4,800 
 Cash 7,200
 (To record the payment of property tax)  

Table (2)

Working note (2):

Determine the amount of prepaid property taxes

2.

To determine

Identify the amount of liability that would be as on December 31, 2019.

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