Need the answer to problem 3-5 in Government and Not-For-Profit Accounting 7th edition "Government activities may be less "profitable" than they appear".

A city prepares its budget in traditional format classifying expenditures by fund and object. In 2010 despite controversy, the city authorized the sale of $20 million in bonds to finance the construction of a new sports and special events arena. Critics charged that contrary to predictions of arena proponents, the arena could not be fiscally self-sustaining. Five years later the arena was completed and began to be used. After its first year in operations, its general managers submitted the following condensed statement of revenues and expenses in millions.

Revenues from ticket sales = 5.7

Revenues from concessions = 2.4

= 8.1

Operating Expenses = 6.6

Interest on Debt = 1.2

= 7.8

Rev over Expenses = 0.3

At the city council meeting when the report was submitted, the council member who had championed the center boasted that the arena was "profitable".

Assume 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 calculate the added visitors generated about .1 million in hotel occupancy tax revenues. These taxes are dedicated to promoting tourism in the city. They also estimated ticket and concession sales plus added economic activity generated by the arena increased the general sales tax revenues by 0.4 million.

* The city had to improve roads, highways and utilities in the arena area at a cost of $6 million that was financed with general obligation debt (not reported in the enterprise fund). Principle 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 arena's neighborhood. The arena compensated the police department for officers who served inside the arena. Those who patrolled outside were paid out of police department funds at a cost of 0.1 million.

*City administrative services (legal, accounting, personnel) provided to the arena at no charge were estimated to be 0.1 million.

*City estimated cost for sanitation, fire, medical due to events at the center were estimated to be 0.2 million.

Questions:

1. Would you agree with the city council member that the arena is 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 classification budget and fund accounting system in assessing the economic costs and benefits of a project - such as the sports and special events arena.

4. What changes in the City's budgeting an accounting structure would overcome these limitations? What additional problems might these changes cause?>