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strayer.acc410.wk1.hw.sln.2011

strayer.acc410.wk1.hw.sln.2011 - ACC 410 Solution to Week 1...

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ACC 410 – Solution to Week 1 Homework Problem 1-2 (1 point per question) 1. b 2. b 3. d 4. b 5. a 6. c 7. a 8. b 9. a 10. b Problem 1-3 (4 points – 1 point per part) 1. The authority’s cash requirements in Year 1 would be as follows (in millions): Wages, salaries and other operating costs $6.0 Interest on bonds 0.5 Purchase of equipment 0.9 Total cash outlays (revenue requirements) $7.4 2. In Year 2, they would be: Wages, salaries and other operating costs $6.0 Interest on bonds 0.5 Total cash outlays (revenue requirements) $6.5 3. In Year 10, they would be: Wages, salaries and other operating costs $ 6.0 Interest on bonds 0.5 Repayment of bonds 10.0 Total cash outlays (revenue requirements) $16.5 4. The budgeting and taxing policies fail to promote interperiod equity. The economic costs incurred by the authority — the wages, salaries, other operating costs, and portion of equipment consumed — were the same each year. Yet, tax payments will depend on when the equipment was purchased and when the debt was repaid. Taxpayers of Year 10 will have to pay for equipment that provided services to the taxpayers of the previous nine years. Interperiod equity could be achieved by budgeting on an accrual rather than a cash basis. The budget would then include an annual charge of $1.3 million for depreciation — $1 million on the ten-year equipment, plus $0.3 million on the three-year equipment. Annual required revenues would be $7.8 million: 1
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Wages, salaries and other operating costs $6.0 Interest on bonds 0.5 Depreciation on equipment 1.3 Total revenue requirements $7.8 This practice might, however, be objectionable to some taxpayers because it requires that they contribute cash to the authority in years prior to those in which it will actually be expended. Thus, for example, at the end of Year 1 the authority will have a cash “reserve” of $0.4 million — the difference between the $7.8 million in taxes collected and the $7.4 million in cash outlays. The authority could also achieve interperiod equity by issuing serial bonds (those in which a portion of the principal matures each year over the life of the issue) or by establishing and contributing to a debt service “sinking fund.” By taking either of these approaches, the authority would, in effect, be repaying the bonds over the period in which the equipment is used and thereby matching equipment costs with equipment benefits.
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