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Cadillac Co. pays taxes in 10 equal installments starting in May each year. The local taxes for the year to 31 March 20X9 were $18900. The business is preparing its financial statements for the year ended 31 January 20X9. What is the prepayment of local taxes at 31 January 20X9?
Please explain how they got the answer as $1260. I do not understand the calculation given even though after watching your lectures on prepayments, I thought I could master any question on this topic. (BPP test) Thank you.
Since they started paying in May, they will have made 9 payments by 31 January.
Each payment is 18900/10 = 1890. So the total paid will have been 17,010.The expense for the period 1 April 20X8 to 31 January 20X9 is 10/12 x 18900 = 15750.
So the prepayment is 17010 – 15750 = 1260
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