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Transactions may have significantly different impacts on a government's budget, governmental fund statements, and government-wide statements. A city prepares its budget on a cash basis. For each of the following, indicate the amount (if any) of an expenditure/expense that the city would be recognize in (1) its budget, (2) its fund statements, and (3) its governmentwide statements. Provide a brief explanation of your response. The city uses the consumption method to account for its inventory. It is the policy of the city to take a full year's depreciation in the year of acquisition and no depreciation in the year of sale or retirement. It recognizes depreciation on a straight-line basis. 1. As budgeted, the city ordered supplies that cost $8 million, received supplies (including those ordered in a prior year) that cost $9 million, paid for supplies that cost $7 million, and used supplies that cost $7.5 million. The city began the year with a supplies inventory that cost $1.5 million. 2. In the prior year, the city signed a five-year lease of telecommunications equipment. The equipment had a fairmarket value of $5 million. In the current year, the city made its first required annual rent payment of $1,252,282. This amount reflected an implicit interest rate of 8 percent. The lease qualifies as a capital lease. 3. The government of the state in which the city is located is responsible for making 50 percent of the city's required contribution to a firefighters' life insurance fund. In the current year, the state and the city each contributed $4 million of the required $8 million. 4. In December, the city transferred $3 million from the general fund to a debt service fund to cover interest on 30year bonds, which were issued 10 years earlier. Interest of $6 million on the bonds is due each September 30 th and March 31st and the \$3 million transfer is intended to cover the interest from October 1 through December 31st that will be due the following March 31st. With respect to the funds statement, consider only the effect on the debt service fund and assume that the city prepares an annual budget for the debt service fund. 5. During the year, city employees earned $4 million in sick leave that they did not take during the year. City policy dictates that employees may accumulate up to five years of sick leave and apply it to days lost to illness while they are employed. The city estimates that of the $4 million, $3.5 million will be taken. The remaining $0.5 will be forfeited. Irrespective of how capital assets are acquired, they are recorded differently in governmental funds than in businesses. In a recent year, Ives Township acquired six police cars at a total cost of $200,000. The vehicles are expected to have a useful life of four years. 1. Prepare the journal entries that the township would make in its general fund in the year of acquisition for each of the following assumptions: - It paid for the cars in cash at the time of acquisition. - It leased the cars and agreed to make, starting in the year of acquisition, four equal payments of $63,095, an amount that represents the annuity required to liquidate a loan of $200,000 at 10 percent interest. The lease would satisfy the criteria necessary to be accounted for as a capital lease. - It issued $200,000 in installment notes to the car dealer, agreeing to repay them in four annual payments of $63,095, starting in the year of acquisition. 2. Comment on how any "off the balance sheet" assets or obligations would be reported in supplementary schedules and the government-wide statements. How an acquisition is financed may dictate the annual reported expenditure. The Mainor School District is about to establish a 30-machine computer lab. It is considering six alternative means of acquiring and financing the machines: 1. Buy the machines outright; cost will be $60,000. 2. Buy the machines and finance them with a $60,000, three-year, 10 percent interest term note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures. 3. Buy the machines and finance them with a $60,000, three-year, 10 percent interest, installment note. The district will repay the note (plus interest) in three end-of-year installments of $24,127 each. 4. Lease the equipment but structure the lease so that it satisfies the criteria of a capital lease. The district will make three $24,127 end-of-year lease payments. a. The district estimates that the equipment has a useful life of three years. b. Determine the present value (using a discount rate of 10 percent) of the cash payments under each option. c. Comment on any incentives that district officials might have either to spread out the payments over the threeyear period (either by a lease or borrowing arrangement) or to postpone the full payment until the third year, rather than to pay for the computers entirely in the year of acquisition. d. Comment on any significant differences in how the six options would be accounted for in government-wide statements instead of governmental fund statements. How would each year's reported expense be determined? Transactions may have significantly different impacts on a government's budget, governmental fund statements, and government-wide statements. A city prepares its budget on a cash basis. For each of the following, indicate the amount (if any) of an expenditure/expense that the city would be recognize in (1) its budget, (2) its fund statements, and (3) its governmentwide statements. Provide a brief explanation of your response. The city uses the consumption method to account for its inventory. It is the policy of the city to take a full year's depreciation in the year of acquisition and no depreciation in the year of sale or retirement. It recognizes depreciation on a straight-line basis. 1. As budgeted, the city ordered supplies that cost $8 million, received supplies (including those ordered in a prior year) that cost $9 million, paid for supplies that cost $7 million, and used supplies that cost $7.5 million. The city began the year with a supplies inventory that cost $1.5 million. 2. In the prior year, the city signed a five-year lease of telecommunications equipment. The equipment had a fairmarket value of $5 million. In the current year, the city made its first required annual rent payment of $1,252,282. This amount reflected an implicit interest rate of 8 percent. The lease qualifies as a capital lease. 3. The government of the state in which the city is located is responsible for making 50 percent of the city's required contribution to a firefighters' life insurance fund. In the current year, the state and the city each contributed $4 million of the required $8 million. 4. In December, the city transferred $3 million from the general fund to a debt service fund to cover interest on 30year bonds, which were issued 10 years earlier. Interest of $6 million on the bonds is due each September 30 th and March 31st and the \$3 million transfer is intended to cover the interest from October 1 through December 31st that will be due the following March 31st. With respect to the funds statement, consider only the effect on the debt service fund and assume that the city prepares an annual budget for the debt service fund. 5. During the year, city employees earned $4 million in sick leave that they did not take during the year. City policy dictates that employees may accumulate up to five years of sick leave and apply it to days lost to illness while they are employed. The city estimates that of the $4 million, $3.5 million will be taken. The remaining $0.5 will be forfeited. Irrespective of how capital assets are acquired, they are recorded differently in governmental funds than in businesses. In a recent year, Ives Township acquired six police cars at a total cost of $200,000. The vehicles are expected to have a useful life of four years. 1. Prepare the journal entries that the township would make in its general fund in the year of acquisition for each of the following assumptions: - It paid for the cars in cash at the time of acquisition. - It leased the cars and agreed to make, starting in the year of acquisition, four equal payments of $63,095, an amount that represents the annuity required to liquidate a loan of $200,000 at 10 percent interest. The lease would satisfy the criteria necessary to be accounted for as a capital lease. - It issued $200,000 in installment notes to the car dealer, agreeing to repay them in four annual payments of $63,095, starting in the year of acquisition. 2. Comment on how any "off the balance sheet" assets or obligations would be reported in supplementary schedules and the government-wide statements. How an acquisition is financed may dictate the annual reported expenditure. The Mainor School District is about to establish a 30-machine computer lab. It is considering six alternative means of acquiring and financing the machines: 1. Buy the machines outright; cost will be $60,000. 2. Buy the machines and finance them with a $60,000, three-year, 10 percent interest term note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures. 3. Buy the machines and finance them with a $60,000, three-year, 10 percent interest, installment note. The district will repay the note (plus interest) in three end-of-year installments of $24,127 each. 4. Lease the equipment but structure the lease so that it satisfies the criteria of a capital lease. The district will make three $24,127 end-of-year lease payments. a. The district estimates that the equipment has a useful life of three years. b. Determine the present value (using a discount rate of 10 percent) of the cash payments under each option. c. Comment on any incentives that district officials might have either to spread out the payments over the threeyear period (either by a lease or borrowing arrangement) or to postpone the full payment until the third year, rather than to pay for the computers entirely in the year of acquisition. d. Comment on any significant differences in how the six options would be accounted for in government-wide statements instead of governmental fund statements. How would each year's reported expense be determined

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