A city prepares its budget in traditional format, classifying expenditures by fund and object. In 2010, amid
Question:
Five years later, the arena was completed and began to be used. After its ï¬rst year of operations, its general managers submitted the following condensed statement of revenues and expenses (in millions):
At the city council meeting, when the report was submitted, the council member who had championed the center glowingly boasted that his prophecy was proving correct; the arena was proï¬table.
Assume that the following information came to your attention:
¢ The arena is accounted for in a separate enterprise fund.
¢ The arena increased the number of overnight visitors to the city. City administrators and economists calculated that the additional visitors generated approximately $0.1 million in hotel occupancy tax revenues.
These taxes are dedicated to promoting tourism in the city. In addition, they estimated that the ticket and concession sales, plus the economic activity generated by the arena, increased general sales tax revenues by $0.4 million.
¢ The city had to improve roads, highways, and utilities in the area surrounding the arena. These improvements, which cost $6 million, were ï¬nanced with general obligation debt (not reported in the enterprise fund). Principal and interest on the debt, paid out of general funds, were $0.5 million. The cost of maintaining the facilities was approximately $0.1 million.
¢ On evenings when events were held in the arena, the city had to increase police protection in the arenas neighborhood. Whereas the arena compensated the police department for police ofï¬cers who served within the arena itself, those who patrolled outside were paid out of police department funds. The police department estimated its additional costs at $0.1 million.
¢ The city provided various administrative services (including legal, accounting, and personnel) to the arena at no charge at an estimated cost of $0.1 million.
¢ The city estimates the cost of additional sanitation, ï¬re, and medical services due to events at the center to be approximately $0.2 million.
1. Would you agree with the council member that the arena was ï¬scally self-sustaining?
2. In which funds would the additional revenues and expenditures be budgeted and accounted for?
3. Comment on the limitations of both the traditional object classiï¬cation budget and fund accounting system in assessing the economic costs and beneï¬ts of a projectsuch as the sports and special events arena.
4. What changes in the citys budgeting and accounting structure would overcome these limitations? What additional problems might these changescause?
Step by Step Answer:
Government and Not for Profit Accounting Concepts and Practices
ISBN: 978-1118155974
6th edition
Authors: Michael H. Granof, Saleha B. Khumawala