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Week Two Homework 1-1 Budgeting practices that satisfy cash requirements may not promote interperiod equity.

This question was answered on May 21, 2010. View the Answer
Week Two Homework
1-1 Budgeting practices that satisfy cash requirements may not promote interperiod equity.


a. The authority’s governing board levies property taxes at rates that will be just sufficient to balance the authority’s budget. What is the amount of tax revenue that it will be required to collect?

b. Assume that in the authority’s second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue will it be required to collect?

c. Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect?

d. Comment on the extent to which the authority’s budgeting and taxing policies promote interperiod equity. What changes would you recommend?



1-3

The dual objectives of assessing interperiod equity and ensuring budgetary compliance may necessitate different accounting practices.


A city engages in the transactions that follow. For each transaction indicate the amount of revenue or expenditure that it should report in 2007. Assume first that the main objective of the financial statements is to enable users to assess budgetary compliance. Then calculate the amounts, assuming that the main objective is to assess interperiod equity. The city prepares its budget on a ‘‘modified’’ cash basis (that is, it expands the definition of cash to include short-term marketable securities), and its fiscal year ends on December 31.

1. Employees earned $128,000 in salaries and wages for the last five days in December 2007. They were paid on
January 8, 2008.

2. A consulting actuary calculated that per an accepted actuarial cost method, the city should contribute $225,000 to its firefighters’ pension fund for benefits earned in 2007. However, the city contributed only
$170,000, the amount budgeted at the start of the year.

3. The city acquired three police cars for $35,000 cash each. The vehicles are expected to last for three years.

4. On December 1, 2007, the city invested $99,000 in short-term commercial paper (promissory notes). The notes matured on January 1, 2008. The city received $100,000. The $1,000 difference between the two amounts represents the city’s return (interest) on the investment.

5. On January 2, 2007, the city acquired a new $10 million office building, financing it with twenty-five-year serial bonds. The bonds are to be repaid evenly over the period they are outstanding—that is, $400,000 per year. The useful life of the building is twenty-five years.

6. On January 3, 2007, the city acquired another $10 million office building, financing this facility with twenty five- year term bonds. These bonds will be repaid entirely when they mature on January 1, 2032. The useful life of this building is also twenty-five years.

7. City restaurants are required to pay a $1,200 annual license fee, the proceeds of which the city uses to fund its restaurant inspection program. The license covers the period July 1 through June 30. In 2007 the city collected $120,000 in fees for the license period beginning July 1, 2007.

8. The city borrowed $300,000 in November 2007 to cover a temporary shortage of cash. It expects to repay the loan in February 2008.


2-1
The following relate to the town of Coupland (dollar amounts in thousands):

• Equipment used in a vehicle repair service that provides service to other departments on a cost-reimbursement basis; the equipment has a ten-year life with no salvage value. $1,400

Property taxes levied and collected $6,300

Hotel taxes (restricted to promotion of tourism) collected $1,200
• Proceeds of bonds to build a parking garage that must be repaid from user charges $4,000
• Proceeds of general obligation bonds to finance construction of a new city hall; the building, which was completed during the year, has a useful life of thirty years with no salvage value $9,000
• Proceeds of a federal grant to hire additional police officers $1,000
• Fees charged to, and collected from, customers by the electric utility $8,000
Match the fund items below with the amounts that follow. An amount may be selected once, more than once, or not at all.

1. Revenue to be recognized in an enterprise fund

2. Revenue to be recognized in special revenue funds

3. Bonds payable to be recognized in the general fund

4. Bonds payable to be recognized in enterprise funds

5. Depreciation expenditure to be recognized in the general fund

6. Depreciation expense to be recognized in internal service funds

7. Revenue to be recognized in an internal service funds

8. Revenue to be recognized in the general fund

9. Long-lived assets to be recognized in the general fund

10. Long-lived assets to be recognized in internal service funds

a. $0

b. $140

c. $900

d. $1,260

e. $1,040

f. $1,400

g. $2,200

h. $4,000

i. $6,300

j. $8,000

k. $8,500

l. $10,400











3-3

A county engages in basic transactions.
Kilbourne County engaged in the following transactions in summary form during its fiscal year. All amounts are in millions.

1. Its commissioners approved a budget for the current fiscal year. It included total revenues of $860 and total appropriations of $850.

2. It ordered office supplies for $20.

3. It incurred the following costs, paying in cash:
Salaries $610
Repairs $ 40
Rent $ 25
Utilities $ 41
Other operating costs $119

4. It ordered equipment costing $9.

5. It received the equipment and was billed for $10, rather than $9 as anticipated.

6. It received the previously ordered supplies and was billed for the amount originally estimated. The county reports the receipt of supplies as expenditures; it does not maintain an inventory account for supplies.

7. It earned and collected revenues of $865.

a. Prepare journal entries as appropriate.

b. Prepare closing entries as appropriate.

c. What would have been the difference in the year-end financial statements, if any, had the county not made the budgetary entries?

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This question was asked on May 21, 2010 and answered on May 21, 2010.

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