EX. 5-3

Transactions may have signi cantly different impacts on a governments budget, governmental fund state- ments, 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.

When permitted an option, the city uses the purchases method to account for its inventory.

It is the policy of the city to take a full years depreciation in the year of acquisition and no depreciation in the year of sale or retirement. It recognizes depreciation on a straightline 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 qualified as a capital lease.

3.The government of the state in which the city is located is responsible for making 50 percent of the citys 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 30th and March 31st and the $3 million transfer is intended to cover the interest