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?

Answer 1

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