Sales taxes should be recognized when the underlying event takes place. A state
ID: 2539902 • Letter: S
Question
Sales taxes should be recognized when the underlying event takes place.
A state requires “large” merchants (i.e., those with sales over a specified dollar amount) to report and remit their sales taxes within 15 days of the end of each month. It requires “small” merchants to report and remit their taxes within 15 days of the end of each quarter.
In January 2018, large merchants remitted sales taxes of $400 million owing to sales of December 2017. In February 2018, they remitted $280 million of sales taxes owing to sales of January 2018. In January small merchants remitted sales taxes of $150 million owing to sales of the fourth quarter of 2015.
1. Prepare an appropriate journal entry to indicate the impact of the transactions on the state’s fund finan- cial statements for the year ending December 31, 2017.
2. Suppose, instead, that 10 percent of the taxes received by the state were collected on behalf of a city within the state. It is the policy of the state to remit the taxes to the city 30 days after it receives them. Prepare an appropriate journal entry to indicate the impact of the transactions on the city’s fund finan- cial statements for the year ending December 31, 2017
3. Suppose instead that it was the policy of the state to remit the taxes to the city 90 days after it receives them. How would your response to Part (2) differ? Explain. Would your response be the same with respect to the city’s government-wide statements?
Explanation / Answer
On 31st December 2017 $ in Millions For accrual of Sales Tax Revenue Receivables from Large & Small Merchangrs Journal entry to indicate the impact of the transactions on the state’s fund finan- cial statements for the year ending December 31, 2017 Sales Tax Receivable from the "Large" merchants Account Dr 400 Sales Tax Receivable from the "Small" merchants Account Dr 150 To Deferred Sales Tax Revenue Account 550 Suppose, instead, that 10 percent of the taxes received by the state were collected on behalf of a city within the state. journal entry to indicate the impact of the transactions on the city’s fund finan- cial statements for the year ending December 31, 2017 Sales Tax Receivable from State Account Dr 55 Deferred Sales TaxRevenue Account Dr 55 As the amount receivable by the state governments is a deffered reveue, the position of receivables will be changed as the sales tax receivables include the accruals for the month of Janury 2018. then the entry would be: Sales Tax Receivable from State (Due) Account Dr 55 Sales Tax Receivable from State (Current) Account Dr 28 Sales TaxRevenue Account 55 Deferred Sales TaxRevenue Account 28
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