Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National's mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, January 1, 20X1 $ 700,000
Escrow payments received during 20X1 1,580,000
Real estate taxes paid during 20X1 1,720,000
Interest on escrow funds during 20X1 50,000
What amount should Kent report as escrow accounts liability in its December 31, 20X1, balance sheet?
A. $510,000
B. $515,000
C. $605,000 Correct
D. $610,000
Explanation:Use the basic accounting equation:
Beginning balance + Additions – Deductions = Ending balance
Escrow accounts liability on January 1, 20X1 $ 700,000
Add: Escrow payments received in 20X1 1,580,000
Net interest credited ($50,000 – 10% of $50,000) 45,000
———-
Subtotal $2,325,000
Less: Real estate taxes paid in 20X1 1,720,000
———-
Escrow accounts liability on December 31, 20X1 $ 605,000
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I thought that since the interesrt was used to reduce future payment, it would be deduction from the liability. Can someone explain my stupidity. What am I missing in the details?
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