On July 1, the first day of its fiscal year, the Town of Eldon levied a $1,000,000 property tax which is payable in full on December 1 of the same year. On September 15, the town decided to borrow $200,000 in 90-day tax anticipation notes to cover operating expenditures until the tax revenues are collected. The journal entry on September 15 to record the issuance of tax anticipation notes will include:
A) A credit to Other Financing Sources-Proceeds of Tax Anticipation Notes.
B) A credit to Tax Anticipation Revenue.
C) A credit to Tax Anticipation Notes Payable.
D) A credit to Deferred Outflows of Resources-Tax Anticipation Notes.

Question

Quizplus · Accepted Answer

The journal entry to record the issuance of tax anticipation notes would include a debit to Cash for $200,000 and a credit to Tax Anticipation Notes Payable for the same amount. This is because the town is borrowing money and creating a liability in the form of the tax anticipation notes payable. Option A is incorrect because "Other Financing Sources-Proceeds of Tax Anticipation Notes" would be credited when the tax anticipation notes are redeemed and the cash is received. Option B is incorrect because revenue cannot be recognized until it is earned, and the town has not yet earned the tax anticipation revenue. Option D is incorrect because deferred outflows of resources are recognized for financial statement purposes when an expenditure is made that is not yet recognized as an expense. There is no expenditure in this scenario that would create a deferred outflow of resources.

On July 1, the First Day of Its Fiscal Year