Reference no: EM131824602
Questions -
Q1. The differences in accounting for an activity in an internal service fund rather than the general fund may be striking.
A school district establishes a vehicle repair shop that provides service to other departments, all of which are accounted for in its general fund. During its ?rst year of operations, the shop engages in the following transactions:
It purchases equipment at a cost of $24 million and issues long-term notes for the purchase price. The useful life of the equipment is eight years, with no residual value.
It purchases supplies at a cost of $4 million. Of these, it uses $3 million. In its governmental funds, the district accounts for supplies using the purchases method.
It incurs $13 million in other operating costs
It bills other departments for $19 million.
For purposes of external reporting, school district of?cials are considering two options:
Account for the vehicle repair shop in an internal service fund
Account for the vehicle repair shop in the general fund
1. For each of the following items, indicate the amounts that are reported in the year- end ?nancial statements of (1) the internal service fund, assuming that the school district selects the ?rst option, and (2) the general fund, assuming that it selects the second option.
a. Billings to other departments (revenues)
b. Cost of supplies (expense or expenditure)
c. Expenses or expenditures relating to acquisition or use of equipment
d. Other operating costs
e. Equipment (asset)
f. Accumulated depreciation
g. Inventory (asset)
h. Notes payable
I. Reserve for inventory
2. What are the total expenses reported in the internal service fund, assuming that the school district selects the ?rst option?
3. What is the total amount of expenditures reported in the general fund, assuming that the school district: (1) selects the ?rst option; the school district: (1) selects the ?rst option;
4. What are the reported revenue and expenses relating to the vehicle repair shop in the district's government-wide statements? Does it matter whether the district accounts for the shop in an internal service fund or in the general fund?
Q2. Investment gains and losses may have to be accounted for differently in nonexpendable than in expendable fund. The McCracken county Humane society (MCHS), which is part of a county's reporting entity, established a permanent fund to provide support for its pet neutering program. As of the start of the year, the fund had a balance of $600,000, composed of both cash and marketable securities. The program itself, which is accounted for in a special revenue fun, is funded by both direct contributions and the income from the permanent fund. At the start of the year, the special revenue fund had assets (all investments) of $26,000.
The following transactions and events occurred during the year
a. The MCHS conducted a "walk your pet day" fund-raising drive. The event raised $120,000, of which$20,000was in pledges expected to be collected shortly after year-
b. The society acquired food and medicine at a cost of $60,000 (cash). During the year, it used $30,000 of these supplies. The society accounts for supplies on consumption basis. It incurred other operating cost (all paid in cash) of $85,000.
c. The society earned interest of $45,000 on investments accounted for in the permanent fund.
d. During the year, the market value of the investment held by the permanent fund increased by $30.000. Per the terms on the agreement establishing the endowment, all capital gains, both realized and unrealized, must be added to principal.
e. During the year, the value of investment held by the special revenue fund increased by $3,000.
f. The society transferred cash from the permanent fund to the special revenue fund in the amount of the earnings of the permanent fund.
1. Prepare journal entries to record the events and transactions. Be sure you indicate the fund in which they should be recorded.
2. In your opinion, should the unrealized gains on the investment held in the special revenue fund be considered expendable or nonexpendable? Explain.
3. How is the transfer from the permanent fund to the special revenue fund reported in the government-wide statements?
Q3. Investment losses cannot be accounted for as the mirror image of investment gains.
On December 31, 2013, the child crisis center establishes an endowment fund with a $5 million gift of securities. Income from the endowment to be used exclusively to support a nutrition program. Expendable income is defined in the indenture agreement so as to include all investment gains, both realized and unrealized. Investment gains and losses are to be accounted for as recommended by the FASB.
During 2014, the endowment earns $100,000 in interest and dividends and spends the entire amount on the nutrition program. The value of its securities portfolio increases by $500,000, from $5 million to $5.5 million.
During 2015, the endowment again earns$100,000 in interest and dividends and spends the entire amount on the nutrition program.
This year, however, the value of its securities portfolio decreases by $800,000, from $5.5 million to $4.7 million.
During 2016, the endowment continues to earn and spend $100,000 in interest and dividends. This year the portfolio recovers $400,000 of its investment losses and at year-end is worth $5.1 million.
At the start of 2014, the center had a cash balance of $600,000 in an unrestricted fund. Over the three-year period, this balance was unaffected by transactions other than those just described by transactions other than just described.
1. Prepare a schedule for each of the three years (2014-2016) in which you summarize the transactions as they affect permanently restricted, temporarily restricted, and unrestricted net assets.
2. At the beginning of 2015, the year of the loss, the total value of the security portfolio was $5.5 million. Of this amount, the initial $5 million was classified as permanently restricted, and the balance as temporarily restricted. Assuming that you adhered to the FASB pronouncement, how much of the loss did you assign to the permanently restricted assets, and how much to the temporarily restricted assets? How can you justify this division of the loss?