Karysa Co. operates in a city in which real estate tax bills for one year are issued in May of the subsequent year. Thus tax bills for 2010 are issued in May 2011 and are payable in July 2011.

Required:

a. Explain how the amount of tax expense for calendar 2010 and the amount of taxes payable (if any) at December 31, 2010, can be determined.

b. Use the horizontal model (or write the journal entry) to show the effect of accruing 2010 taxes of $7,200 at December 31, 2010.

c. Assume that the actual tax bill, received in May 2011, was for $7,500. Use the horizontal model (or write the journal entry) to show the effects of the appropriate adjustment to the amount previously accrued.

d. Karysa Co.’s real estate taxes have been increasing at the rate of 10% annually. Determine the income statement and balance sheet effects of not accruing 2010 taxes at December 31, 2010 (assuming that taxes in b are not accrued).