Chapter 8, Problem 19EP

 Tax Custodial Fund. (LO8-2) The county collector of Suncoast County is responsible for collecting all property taxes levied by funds and governments within the boundaries of the county. To reimburse the county for estimated administrative expenses of operating the tax custodial fund, the custodial fund deducts 1.5 percent from the collections for the town, the school district, and the other towns. The total amount deducted is added to the collections for the county and remitted to the Suncoast County General Fund.

  The following events occurred during the year:

1. 1. Current-year tax levies to be collected by the custodial fund were

1. 2. $13,700,000 of current taxes was collected during the first half of the year.
2. 3. Liabilities to all funds and governments as a result of the first half-year collections were recorded. (A schedule of amounts collected for each participant, showing the amount withheld for the county General Fund and net amounts due the participants, is recommended for determining amounts to be recorded for this transaction.)
3. 4. All cash in the tax custodial fund was distributed.
4. 5. All additions and deductions were recorded by the custodial fund. Additions and deductions are aggregated because resources are held less than three months.

   Required

5. a.      Make journal entries for each of the foregoing transactions that affected the tax custodial fund.
6. b.      Make journal entries for each of the foregoing transactions that affected the Suncoast County General Fund. Begin with the tax levy entry, assuming 4 percent of the gross levy will be uncollectible.
7. c.       Make journal entries for each of the foregoing entries that affected the Town of Bayshore General Fund. Begin with the tax levy entry, assuming 2 percent of the gross levy will be uncollectible.
8. d.      Which financial statements would be prepared by the tax custodial fund?

To determine

Prepare the journal entries for the each of the foregoing transactions that affected the tax custodial fund.

Explanation of Solution

Fiduciary activities: Fiduciary activities are those activities done by persons or organizations to another parties with utmost good faith and trust. A fiduciary activity may involve managing funds, assets and other valuables of a person or a group of people.

The person or organization involved in fiduciary activities need to act ethically in the best interest of others. Government also involve in fiduciary activities by holding the assets of individuals or organization to benefit them.

Tax Custodial fund: One government for different governmental funds and for different governments collects the tax Custodial fund. The tax collected from the citizens is accounted and remit adequate amount of tax to appropriate funds and other governments. The major issue, which makes the accounting of “tax Custodial fund” complex, is the time taken for the collection of taxes.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare the journal entries for the each of the foregoing transactions that affected the tax custodial fund:

Date	Accounts title and explanation	Post ref.	Debit ($)	Credit ($)
	Taxes receivable for other funds and governments—current		$24,843,000
	Due to other funds and governments			$24,843,000
	(To record the current year tax levied)
	Cash		$13,700,000
	Taxes receivable for other funds and governments—current			$13,700,000
	(To record the collection of current year tax )
	Due to other funds and governments		$13,700,000
	Due to county general fund			$5,818,294
	Due to town of bay shore			$2,629,046
	Due to sun Coast County consolidated     school district			$3,557,903
	Due to various towns			$1,694,757
	(To record the reimbursement of county)
	Due to county general fund		$5,818,294
	Due to town of bay shore		$2,629,046
	Due to sun coast county consolidated          school district		$3,557,903
	Due to various towns		$1,694,757
	Cash			$13,700,000
	(To record the cash payment made to reimbursement of county)
	Deductions—Administrative fee		$120,025
	Deductions—payments of property taxes to other governments		$7,881,706
	Additions—property tax collections for other governments			$7,001,731
	(To record the additions and deductions of custodial funds)

Table (1)

Notes to the above table:

Calculate the tax collected from Bay Shore:

The tax collected from Bay Shore is calculated by initially dividing the amount of tax on Bay Shore by total amount of tax levied and multiplying it with the cash collected. The amount of tax on Bay Shore is $4,840,000, total amount of tax levied is $24,843,000 and cash collected is $13,700,000. The calculation is as follows:

$\begin{array}{c}\text{Tax collected}=\left(\frac{\text{Amount of tax on bayshore}}{\text{Total amount of tax levied}}\right)\times \text{Cash}\\ =\left(\frac{\$4,840,000}{\$24,843,000}\right)\times \$13,700,000\\ =\$0.194823491\times \$13,700,000\\ =\$2,669,082\end{array}$

Thus, the tax collected on Bay Shore is $2,669,082.

Calculate Custodian’s liability:

The Custodian’s liability is calculated by deducting 1.5 percentage of the tax collected from it. The amount to be deducted is $40,036$\left(\$2,669,082\times 1.5\%\right)$. The calculation is as below:

$\begin{array}{c}\text{Agency liability}=\text{Tax collected}-1.5\%\text{ of tax collected}\\ =\$2,669,082-\$40,036\\ =\$2,629,046\end{array}$

Thus, the Custodian’s liability is $2,629,046.

Calculate the tax collected from school:

The tax collected from school is calculated by initially dividing the amount of tax on school by total amount of tax levied and multiplying it with the cash collected. The amount of tax on school is $6,550,000, total amount of tax levied is $24,843,000 and cash collected is $13,700,000. The calculation is as follows:

$\begin{array}{c}\text{Tax collected}=\left(\frac{\text{Amount of tax on school}}{\text{Total amount of tax levied}}\right)\times \text{Cash}\\ =\left(\frac{\$6,550,000}{\$24,843,000}\right)\times \$13,700,000\\ =\$0.263655758\times \$13,700,000\\ =\$3,612,084\end{array}$

Thus, the tax collected on school is $3,612,084.

Calculate agency’s liability:

The agency’s liability is calculated by deducting 1.5 percentage of the tax collected from it. The amount to be deducted is $54,181$\left(\$3,612,084\times 1.5\%\right)$. The calculation is as below:

$\begin{array}{c}\text{Agency liability}=\text{Tax collected}-1.5\%\text{ of tax collected}\\ =\$3,612,084-\$54,181\\ =\$3,557,903\end{array}$

Thus, the agency’s liability is $3,557,903.

Calculate the tax collected from towns:

The tax collected from towns is calculated by initially dividing the amount of tax on towns by total amount of tax levied and multiplying it with the cash collected. The amount of tax on town is $3,120,000, total amount of tax levied is $24,843,000 and cash collected is $13,700,000. The calculation is as follows:

$\begin{array}{c}\text{Tax collected}=\left(\frac{\text{Amount of tax on school}}{\text{Total amount of tax levied}}\right)\times \text{Cash}\\ =\left(\frac{\$3,120,000}{\$24,843,000}\right)\times \$13,700,000\\ =\$0.125588697\times \$13,700,000\\ =\$1,720,565\end{array}$

Thus, the tax collected on town is $1,720,565.

Calculate agency’s liability:

The agency’s liability is calculated by deducting 1.5 percentage of the tax collected from it. The amount to be deducted is $25,808$\left(\$1,720,565\times 1.5\%\right)$. The calculation is as below:

$\begin{array}{c}\text{Agency liability}=\text{Tax collected}-1.5\%\text{ of tax collected}\\ =\$1,720,565-\$25,808\\ =\$1,694,757\end{array}$

Thus, the agency’s liability is $1,694,757.

Calculate the tax collected from county:

The tax collected from county is calculated by initially dividing the amount of tax on county by total amount of tax levied and multiplying it with the cash collected. The amount of tax on county is $10,333,000, total amount of tax levied is $24,843,000 and cash collected is $13,700,000. The calculation is as follows:

$\begin{array}{c}\text{Tax collected}=\left(\frac{\text{Amount of tax on county}}{\text{Total amount of tax levied}}\right)\times \text{Cash}\\ =\left(\frac{\$10,333,000}{\$24,843,000}\right)\times \$13,700,000\\ =\$0.415932053\times \$13,700,000\\ =\$5,698,269\end{array}$

Thus, the tax collected on town is $5,698,269.

Calculate agency’s liability:

The agency’s liability is calculated by adding all the deductions made in case of Bay Shore, school, and town. The amount to be added is $120,025$\left(\$40,036+\$54,181+\$25,808\right)$. The calculation is as below:

$\begin{array}{c}\text{Agency liability}=\text{Tax collected}-\text{Total deductions}\\ =\$5,698,269+\$120,025\\ =\$5,818,294\end{array}$

Thus, the agency’s liability is $5,818,294.

To determine

Prepare the journal entries for the each of the foregoing transactions that affected the S county general fund.

Explanation of Solution

Prepare the journal entries for the each of the foregoing transactions that affected the S county general fund:

Date	Accounts title and explanation	Post ref.	Debit ($)	Credit ($)
	Taxes receivable - Current		$10,333,000
	Estimated uncollectible current taxes			$413,000
	Revenues			$9,919,680
	(To record the current year tax levied)
	Cash		$5,818,294
	Taxes receivable - Current			$5,698,269
	Revenues (collection fees)
	(To record the collection of current year tax )

Table (2)

Calculate uncollectible current tax and revenues:

It is given that the uncollectible current tax is 4 percent of the gross levy. Here, the gross levy is $10,333,000. The uncollectible amount is $413,320$\left(\$10,333,000\times 4\%\right)$. Revenue amount is the difference between gross levy and uncollectible amount. It is calculated as $9,919,680$\left(\$10,333,000-\$413,320\right)$.

To determine

Prepare the journal entries for the each of the foregoing transactions that affected the S county general fund.

Explanation of Solution

Prepare the journal entries for the each of the foregoing transactions that affected the S county general fund:

Date	Accounts title and explanation	Post ref.	Debit ($)	Credit ($)
	Taxes receivable - Current		$4,840,000
	Estimated uncollectible current taxes			$96,800
	Revenues			$4,743,200
	(To record the current year tax levied)
	Cash		$2,629,046
	Expenditures (collection fees)		$40,036
	Taxes receivable - Current			$2,669,082
	(To record the collection of current year tax )

Table (3)

Calculate uncollectible current tax and revenues:

It is given that the uncollectible current tax is 4 percent of the gross levy. Here, the gross levy is $4,840,000. The uncollectible amount is $96,800$\left(\$4,840,000\times 4\%\right)$. Revenue amount is the difference between gross levy and uncollectible amount. It is calculated as $4,743,200$\left(\$4,840,000-\$96,800\right)$.

To determine

State the financial statements that would be prepared by the tax custodial fund.

Explanation of Solution

Financial statement to be prepared by the tax Custodial fund:

Tax custodial fund net position is the financial statement to be prepared by the tax custodial fund, which shows the balances of assets and liabilities of the fund. It also comprises of other custodial funds used by the company. In the statement of fiduciary net position, the total asset and liabilities of custodial funds is shown in the single custodial fund column.