Diamond Services was organized on April 1 of the current year. On April 2, Diamond Services prepaid $28,800 to the city for taxes (license fees) for the next 12 months and debited the prepaid taxes account. Diamond Services 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 $49,800.
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?
Answer:
a. Taxes Expense 21,600 Prepaid Taxes 21,600 Prepaid taxes expired [($28,800 ÷ 12 months) × 9 months]. Taxes Expense 49,800 Taxes Payable 49,800 Accrued taxes.
