E. 4-7

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 fifteen days of the end of each month. It requires small merchants to report and remit their taxes within fifteen days of the end of each quarter.

In January 2012, large merchants remitted sales taxes of $400 million owing to sales of December 2011. In February 2012, they remitted $280 million of sales taxes owing to sales of January 2012. In January small merchants remitted sales taxes of $150 million owing to sales of the fourth quarter of 2011.

1.

Prepare an appropriate journal entry to indicate the impact of the transactions on the states fund financial statements for the year ending December 31, 2011.

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 citys fund financial statements for the year ending December 31, 2011.