Sellers Greg and Joyce’s real estate taxes for the year are $1850. The closing is set for May 12. Using the 365-day method, and the seller paying for the day of closing, which statement is true?
Credit the seller $1,850; debit the buyer $1,850
Credit the seller $668.98; debit the buyer $668.98
Credit the buyer $1,054.14; debit the seller $1,054.14
Credit the buyer $668.98; debit the seller $668.98
Please explain answer !!!
Answer is second option
Detailed explanation as described as follows,:;
It is the concept in relation to PRORATION
Under which concept there is need to pay taxes for using property by the person who owns it for that year.
But proration comes to an exists when some portion of period owned by one person (seller), and remaining portion of period owned by another prison(buyer).
In the given question
Seller paid the entire amount of tax for whole year, but owned till may 12. After he sold property to another (buyer).
Computation of tax amount payable by each of them under proration:-
Annual rent=$1850
Number of days seller owned the property
=132 days (from January to may 12th)
=1850*(132/365)
=669$(approx)
therefore seller have to pay only 669$, but he already paid entire amount of 1859$, so he have to get/recover the remaining amount from buyer himself.
In the PRORATION concept buyer should be debited with 669$, and seller should be credited with 669$.
Therefore answer would be second option.
Thank you:-)
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