Question

Provide journal entries for each transaction:

1. The city levied $300,000 of special property taxes that are restricted by statue and by bond indentures for the servicing of general obligation bonds. One percent (1%) of the taxes is expected to be uncollectible.

2. The city collected $246,800 of property taxes before the due date for taxes. The remainder of the taxes receivable become delinquent.

3. The city levied interest and penalties of $6,650 on the overdue taxes receivable. $1,370 of the interest and penalties is expected to prove uncollectible. The interest and penalties on taxes are restricted for debt service as well.

4. The city collected $41,040 of delinquent taxes and $5,130 of interest and penalties receivable.

5. The city wrote off uncollectible taxes receivable of $4,370 and related interest and penalties of $1,370.

6. Investments that cost $1,000,000 were sold for $1,050,000. Investment income is not restricted, but is retained in the fund to be used for debt service if needed.

7. The city paid interest of $800,000 on bonds payable and retired $500,000 of principal.

8. $45,050 of the Dec. 31, 20X4, balance of delinquent taxes receivable and $6,950 of the Dec. 31, 20X4, balance of interest and penalties receivable are not expected to be collected within the first 60 days of 20X5. ( Jan. 1, 20X4, delinquent taxes receivable balance included $43,100 of taxes that were collected after the first 60 days of 20X4, and the Jan. 1, 20X4, interest and penalties receivable balance included $6,900 of interest and penalties on taxes that were collected after the first 60 days of 20X4.

9. The fair value of investments at year-end was $254,000.

Answer 1

As required in the question to pass journal entries. Below are the journals.

Particulars                                                                           Debit        Credit

1.

Taxes Receivable - Current                            Dr.                   300,000

Estimated Uncollectible Current Taxes           Cr. 3,000                       

General Revenues – Property Taxes             Cr.                                   297,000

2.

Cash                                                                Dr.                   246,800

Taxes Receivable- Current                             Cr. 246,800

Taxes Receivable—Delinquent                       Dr.                   53,200

Estimated Uncollectible Current Taxes          Dr.                   3,000

Taxes Receivable—Current                            Cr.                                           53,200

Estimated Uncollectible Delinquent Taxes     Cr.                                              3,000

3.

Interest and Penalties Receivable on Taxes   Dr.                   6,650

Estimated Uncollectible Interest and Penalties   Cr.    1,370

Revenues                                                         Cr.                                           5,280

4.

Cash                                                                Dr.                   46,170

Taxes Receivable—Delinquent                       Cr.                                           41,040

Interest and Penalties Receivable on Taxes   Cr.                                             5,130

5.

Estimated Uncollectible Delinquent Taxes     Dr.                     4,370

Estimated Uncollectible Interest & Penalties Dr.                     1,370

Taxes Receivable—Delinquent                     Cr.                                           4,370

Interest and Penalties Receivable on Taxes Cr.                                             1,370

6.

Cash                                                                Dr.                   1,050,00

Investment                                                      Cr.                                           1,000,000

Retained Earnings                                           Cr.                                                 50,000

7.

Bond Interest Expenses                                   Dr.                     800,000

Bonds Payable                                                 Dr.                      500,000

Cash                                                                Cr.                                           1,300,000

8.

Estimated Uncollectible Delinquent Taxes     Dr.                        45,050

Estimated Uncollectible Interest & Penalties Dr.                          6,950

Taxes Receivable—Delinquent                       Cr.                                                 45,050

Interest and Penalties Receivable on Taxes Cr.                                                   6,950

9.

Due to insufficient information about the value of investment, I am explaining below the accounting treatment of fair value of investment if the value is increase or decrease.

Increase in value of asset/decrease in liability

The journal entry to recognise an increase in the fair value of a financial asset, or the decrease in fair value of a financial liability is:

Financial Asset/Financial Financial Liability Dr.

Increase in Fair Value                                     Cr.

Next, we will recognise the deferred tax implications of the fair value gain.

Income Tax Expense                                       Dr.

Deferred Tax Liability                                     Cr.

Decrease in value of asset/increase in liability

Decrease in Fair Value Dr.

Financial Asset/Financial Financial Liability Cr.

Now we must recognise the tax effect of the fair value loss on the financial instruments:

Deferred Tax Liability                                     Dr.

Income Tax Expense                                     Cr.