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, meaning the buyer receives a credit for the taxes already paid by the seller, while the seller incurs a debit for those same taxes.

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 advance payment of taxes. The seller should receive a debit for the taxes they have already paid, not a credit.

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

This option is also incorrect as it implies that there would be no credit to the buyer for the taxes they should not be responsible for since they were paid in advance. The buyer must receive a credit reflecting the seller's prepayment.

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

This option is correct. It accurately reflects that the buyer receives a credit for the amount of real estate taxes already paid by the seller in advance, while the seller is debited for that same amount, ensuring a fair adjustment at closing.

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

This option is incorrect because it reverses the necessary accounting for the prepayment of taxes. The buyer should not be debited for taxes that have already been paid by the seller, nor should the seller receive a credit for an expense they have already incurred.

Conclusion

Option C is definitively correct because it properly illustrates the financial adjustments required when real estate taxes are paid in advance. In this scenario, the buyer benefits from a credit for the prepaid taxes, while the seller incurs a debit, reflecting the true financial responsibilities of each party at closing. All other options misrepresent the necessary adjustments related to the advance payment of taxes.