[sw22]

Andular Financial Services was organized on April 1 of the current year. On April 2, Andular prepaid $9,000 to the city taxes (license fees) for the next 12 months and debited the prepaid taxes account. Andular 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 (April 1 to December 31) is $34,500.
(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?

[midwestguy72]

a) If you paid $9000 for 12 months of fees, that equals $750/month expense. The initial entry on April 1 looked like this:

Prepaid Taxes 9000
Cash 9000

Since 9 months have gone by (April-December), you need to expense 9 months worth of taxes. 9*750=6750. The adjusting entry is:

Tax expense (fees) 6750
Prepaid Taxes 6750

Next, you need to expense the estimated property tax for the current year even though it won't be paid until January. Debit the expense and credit a liability (payable).

Property Tax Expense 34500
Property Tax Payable 34500

b) Total tax expense is the sum of the two expenses in the adjusting entries. 6750+34500=41,250