View the step-by-step solution to: E. 4-7 Sales taxes should be recognized when the underlying

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 state’s 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 city’s fund financial statements for
the year ending December 31, 2011.
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