Question

P4-13

In some types of transactions, assets are recognized concurrently with revenues; in others they are not.

In October 2021, the Village of Mason levied $80 million of property taxes for its 2022 fiscal year (which is the same as the calendar year). The taxes are payable 50 percent by December 31, 2021, and 50 percent by June 30, 2022. The village collected $55 million of the 2022 taxes by year‐end 2021 and the $25 million balance by the end of 2022. The government has a legally enforceable claim on the taxed property on the first due date—that is, December 31, 2021.

In December 2021, the state announced that the village would receive $3 million in state assistance. The funds were paid in January 2022 and could have been used (per terms of the state legislation) to cover any legitimate village expenditures incurred in 2022.

1. Prepare fund journal entries to summarize the property tax and grant activity for the fiscal years ending December 31, 2021, and 2022.
2. How would you justify any apparent inconsistencies as to if and when you recognized the taxes receivable as opposed to the grants receivable?

Answer 1

A	Prepare fund journal entries to summarize the property tax and grant activity for the fiscal years ending December 31, 2021, and 2022.
	Year	Account	Debit ($ in million)	Credit ($ in million)
	2021	Property tax receivable	80
		To Revenue		80
		(Being the government has a legally enforceable claim on the taxed property on the due date i.e. December 31, 2021)
	2021	Cash/Bank	55
		To Property tax receivable		55
		(Being amount received for the property tax billed during the year)
	2022	Cash/Bank	25
		To Property tax receivable		25
		(Being amount received for the property tax billed during 2021)
B	How would you justify any apparent inconsistencies as to if and when you recognized the taxes receivable as opposed to the grants receivable?
	Tax receivables will be recognized when government has enforceable right to receive it i.e. on the due date. Though its paid over the period, the right to receive arised on the year 2021. Therefore, the whole amount is recognized as receivable in year 2021 it self.
	Government grant will not be recognized in year 2021 as there is only an announcement that grant will be received. The Village does not have any enforceable right to receive it. Therefore, enforceability to the amount receivable is very necessary to recognize it as an asset. Also, the prudance accounting principal cannot be applied here to receognise receivable. Prudance accounting principal applies only to the losses or expenses.
	Further, the grant amount is received in year 2022, therefore grant will be recognized in year 2022.