Prepaid taxes are recorded as what in the closing entries?

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Study for the Burk Baker National Test. Use flashcards and multiple choice questions with hints and explanations to prepare effectively. Get ready for your exam!

Multiple Choice

Prepaid taxes are recorded as what in the closing entries?

Explanation:
Prepaid taxes are an asset representing taxes paid in advance. When a property is sold, any portion of prepaid taxes that will benefit the buyer after closing is transferred to the buyer. In the closing entries you reflect this by debiting the buyer’s Prepaid Taxes (increasing the buyer’s asset) and crediting the seller (removing the prepaid tax asset from the seller’s books). This shows the buyer now owns the benefit of those prepaid taxes. Debiting the seller and crediting the buyer would imply the opposite transfer, which doesn’t match the actual settlement.

Prepaid taxes are an asset representing taxes paid in advance. When a property is sold, any portion of prepaid taxes that will benefit the buyer after closing is transferred to the buyer. In the closing entries you reflect this by debiting the buyer’s Prepaid Taxes (increasing the buyer’s asset) and crediting the seller (removing the prepaid tax asset from the seller’s books). This shows the buyer now owns the benefit of those prepaid taxes. Debiting the seller and crediting the buyer would imply the opposite transfer, which doesn’t match the actual settlement.

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