85. Real estate taxes that are paid in advance are prorated on the closing statement as:
Answer: C
Real estate taxes paid in advance are prorated as a credit to the buyer and a debit to the seller on the closing statement.
When real estate taxes are paid in advance, they are prorated on the closing statement, resulting in a credit to the buyer and a debit to the seller. This reflects the buyer's benefit from the prepaid taxes for the portion of the tax period they will occupy the property.
A) no entry to buyer; a credit to seller.
This option is incorrect because it suggests that there would be no adjustment for the buyer, which does not account for the fact that the buyer is entitled to a credit for the prepaid taxes. The seller should be debited for the taxes that will benefit the buyer.
B) no entry to buyer; a debit to seller.
This option is incorrect as well, as it implies that there would be no credit for the buyer, which would not accurately represent the buyer's financial position regarding the prepaid taxes. The seller must be debited for the amount of taxes that the buyer is effectively receiving.
C) a credit to buyer; a debit to seller.
This is the correct choice, as it accurately describes the treatment of prepaid real estate taxes on the closing statement. The buyer receives a credit for the taxes already paid for the time they will own the property, while the seller is debited for that same amount, reflecting their obligation for taxes not used by the buyer.
D) a debit to buyer; a credit to seller.
This option is incorrect because it incorrectly attributes the financial responsibility for the prepaid taxes. The buyer should not be debited for taxes that they will benefit from after the closing; instead, the seller should be credited for the prepaid amount.
Conclusion
The correct answer, C, clearly outlines the proper financial adjustments on the closing statement for real estate transactions involving prepaid taxes. All other options fail to reflect the accurate treatment of these taxes, either misallocating credits and debits or omitting necessary entries for the buyer. Understanding this concept is crucial for accurate real estate transaction accounting.