Monday, June 29, 2009

Insurance & Taxes

Tax
Debit the seller and credit the buyer. Since taxes are typically paid in arrears (after the due date) the seller owes money to the buyer.

The taxes for the year 2005 were $1,936.00. They were paid in arrears, and paid in full. If the property sold and the transaction closed on November 15, 2006, what was the amount of the tax proration, and how did it appear on the settlement statement?

a) Debit the buyer $242.00; credit the seller $242.00.

b) Credit the buyer $242.00; debit the seller $1694.00.

c) Debit the seller $1694.00; credit the buyer $242.00.

d) Credit the buyer $1694.00; debit the seller $1694.00.


If you read this problem carefully you will note the detractor of the taxes being paid in full for the previous year and ignore it. The closing took place on November 15, 2006, and the taxes are not paid just as in the previous questions. So the seller owes for 10 months and 15 days or 315 total days. Taxes were $1,936.00 divided by 360 days = $5.38 a day X 315 days = $1,694.00 debit the seller and credit the buyer. – Answer D


Insurance

Credit the seller and debit the buyer. Since an insurance policy that is assumed is usually paid in full, the proration would be the opposite of a tax proration. Crediting the seller and debiting the buyer would be the usual choice. The seller has paid for the policy in advance. The seller should receive a credit for the time paid for, but not used. The buyer will be debited for the balance of the policy.


A closing took place on July 30, 2005. The seller had a 1-year insurance policy that cost $195.00. The policy expired on March 30, 2006. If the buyer assumed the policy, how much was the insurance proration, and how did it appear on a full settlement statement? Same process as question 1.

a) Debit the seller $130.00; credit the buyer $130.00.

b) Credit the seller $130.00; debit the buyer $130.00.

c) Debit the seller $866.25; credit the buyer $866.25.

d) Credit the seller $866.25; debit the buyer $866.25.


The seller paid for 8 full months that were not used on this policy. The policy costs $195.00 a year divided by 12 = $16.25 a month X 8 months = $130.00 debit the buyer and credit the seller. – Answer B



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