Question

A city forecloses on a property because property taxes had not been paid. The city sells the property to collect its taxes and interest of $12,000. The net proceeds (after the sales commission) from the sale were $13,800. Which of the following entries should be made when the sale occurs?

a. Debit Cash for $12,000
b. Credit Property taxes receivable for $13,800.
c. Credit Allowance for uncollectible property taxes for $1,800.
d. Credit Vouchers payable for $1,800.

Answer 1

The proper accounting entry for a city's sale of foreclosed property is to debit cash for the full sale amount, credit property taxes receivable for the due taxes and interest, and credit allowance for uncollectible property taxes or another suitable account for any surplus.

Step-by-step explanation:

When a city forecloses on a property for unpaid property taxes and then sells the property, the accounting entries reflect the transaction's financial impact. In the scenario provided, the net proceeds from the sale after the sales commission are $13,800, from which the city must collect its taxes and interest of $12,000. The difference between the net proceeds and the amount of taxes and interest owed would typically be recognized as additional revenue or as a reduction of the allowance for uncollectible property taxes if such an account is maintained.

Therefore, the correct journal entry, from the options provided, would be to Debit Cash for $13,800 (total proceeds from the sale), Credit Property Taxes Receivable for $12,000 (the amount of taxes and interest due), and Credit Allowance for Uncollectible Property Taxes (or possibly another revenue account) for $1,800 (the difference).