Question 77

Real estate taxes that are paid in advance are prorated on the closing statement as a credit to buyer; a debit to seller.

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 that the buyer is entitled to the portion of taxes that cover the period after the closing date.

A) no entry to buyer; a credit to seller.

This option is incorrect because there should be an entry for the buyer, as they are receiving a credit for the prepaid taxes that cover the period after the closing. A credit to the seller is not applicable in this scenario.

B) no entry to buyer; a debit to seller.

This choice is also incorrect as it suggests that there would be no credit to the buyer. The buyer is entitled to a credit for the advance taxes, which means there must be an entry for them on the closing statement.

C) a credit to buyer; a debit to seller.

This option is correct because it accurately describes the proration of prepaid real estate taxes. The buyer receives a credit for the amount of taxes that cover the time they will own the property, while the seller is debited for the prepaid amount that they no longer benefit from after the closing.

D) a debit to buyer; a credit to seller.

This choice is incorrect as it reverses the proper accounting treatment. The buyer should not be debited, as they are not responsible for the taxes that the seller has already paid in advance for the time after closing.

Conclusion

The correct answer is definitively right because it aligns with standard real estate practices regarding the treatment of prepaid taxes during closing. Other options fail to accurately represent the financial adjustments required, as they either omit necessary entries for the buyer or incorrectly allocate credits and debits.