Government and Not-for-Profit Accounting - Recognizing Expenditures in Governmental Funds

Exercise 5-3:

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 recognize in (1) its budget, (2) its fund statements, and (3) its government-wide 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 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 fair-market value of $5 million. In the current year the city made its first required annual rent payment of $1,252,282. This amount reflected and 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 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 30-year bonds, which were issued 10 years earlier. Interest of $6 million on the bonds is due each September 30^th and March 31^st and the $3 million transfer is intended to cover the interest from October 1 through December 31^st that will be due the following March 31^st. 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.