Subject: Finance and Accounting
Topic: SAMMY COMPANY TAX ACCOUNTING
Language: English (U.S.)
Pages: 2
Instructions
Students will provide the journal entry to record the monthly property tax accrual, to record the payment of the taxes, and to record the monthly adjusting entry at the end of the month. Sammy Company is located in a county that assesses property for tax purposes on July 1 for the period July 1–June 30. The tax rate is not determined until October 15, and the tax bills are mailed October 22 with payment due by December 31. For the prior fiscal year, the Sammy Company paid $22,500. The tax bill for the current fiscal year (July 1, 2014–June 30, 2015) is received on October 28, and property taxes have increased to$ 22,838. The company pays this amount on October 31. Complete the following: Record the monthly property tax accrual that is recorded in July 2014. Record the payment of the taxes on October 31. Record the monthly adjusting entry on October 31. According to generally accepted accounting principles (GAAP), discuss how current liabilities should be classified. Provide an example of each, and discuss how current liabilities are valued at the balance sheet.

Sammy Company Tax Accounting

Question 1:

Accrued property taxes are taxes that are owed to the local government or the state by a company but are not yet paid. These taxes are recorded as current liabilities in the balance sheet. This is because they are usually payable in less than 12 months. The purpose of accruing these and other taxes is to adjust for the timing between the actual creation of the liability and its payment to the relevant authorities.

Debit

Credit

Property Tax Expense

$22,838

Property Tax Payable

$22,838

To accrue one year property tax owed expense

Question 2:

On 31 October, the company would have paid for the accrued property tax to the relevant authorities. The journal entry for the payment of taxes on 31st October would look as follows:

Debit

Credit

Property Tax Payable

$22,838

Bank

$22,838


Question 3:

Adjusting entries are usually made at the end of an accounting period. The entries are made to account for items that are not recorded in the business’s daily transactions. These entries are made in a general journal in traditional accounting practices.  

October 31st

Debit

Credit

Property Tax Payable

$22,838

Bank

$22,838

Question 4:

Current liabilities can be classified into several categories. The Accounts Payable, also known as the trade accounts payable, indicates the amount owed to other companies and other entities as a result of supplies, goods and services that the company has acquired from them throughout the year. Conventionally, these payments are made within 30 to 90 days of the invoice date. However, repayment period is wholly dependent on the relationship between the company and the vendor.

The notes payable are financial obligations that are recorded in the form of written notes. Notes payable are used more often than the accounts payable. The reason for this is they give the lender a form of documentation of the transaction and consequent obligation in case legal means are necessary to collect the debt. They also require the borrower to pay interest at varying interest rates.

The Accrued Salaries Payable is another classification of current liabilities in the balance sheet. Salaries are an accrued liability because they relate to the generation of income in the current financial period. The amount recorded under this classification will also include the payroll taxes that the company is responsible for. Under the payroll taxes, there is another classification known as the withholding taxes. Companies are required by law to withhold certain amounts of money from the employees’ gross salaries.

Companies such as airlines and magazines usually receive money for services that they have not yet rendered. These revenues are usually described as unearned revenues. When the advance is received, this current liability is increased and so is the Cash account. However, when the services are rendered, the unearned revenue is debited while the earned revenue account is credited.

The Sales Taxes Payable is a classification that indicates the amount of sales taxes that the company owes the relevant government authorities. The sales taxes are presented as a percentage of the sale price. The sales tax payable is classified as a current liability because its satisfaction will take place in the following month or next financial quarter.

Other current liabilities include the income tax payable and current installments of long-term debt. The income tax payable is based on the company’s pretax income. The company satisfies the estimated liability by remitting tax to a variety of taxing authorities. The current installments of long-term debt are those components of the debt that are due in the current or upcoming financial period. They are usually referred to as the current maturities of the long-term debt that they are associated with. These obligations include bond issues, mortgages, and leases.