The dual objectives of assessing interperiod equity and ensuring

budgetary compliance may necessitate different accounting

practices.

A city engages in the transactions that follow. For each

transaction indicate the amount of revenue or expenditure

that it should report in 2014. Assume first that the main

objective of the financial statements is to enable users to

assess budgetary compliance. Then calculate the amounts,

assuming that the main objective is to assess interperiod

equity. The city prepares its budget on a modified cash

basis (that is, it expands the definition of cash to include

short-term marketable securities), and its fiscal year ends

on December 31.

1. Employees earned $128,000 in salaries and wages for

the last five days in December 2014. They were paid on

January 8, 2015.

2. A consulting actuary calculated that per an accepted

actuarial cost method, the city should contribute

$225,000 to its firefighters pension fund for benefits

earned in 2014. However, the city contributed only

$170,000, the amount budgeted at the start of the year.

3. The city acquired three police cars for $35,000 cash

each. The vehicles are expected to last for three years.

4. On December 1, 2014, the city invested $99,000 in

short-term commercial paper (promissory notes). The

notes matured on January 1, 2015. The city received

$100,000. The $1,000 difference between the two

amounts represents the citys return (interest) on the

investment.

5. On January 2, 2014, the city acquired a new $10 million

office building, financing it with 25-year serial bonds.

The bonds are to be repaid evenly over the period they

are outstandingthat is, $400,000 per year. The useful

life of the building is 25 years.

6. On January 3, 2014, the city acquired another $10

million office building, financing this facility with 25-

year term bonds. These bonds will be repaid entirely

when they mature on January 1, 2039. The useful life of

this building is also 25 years.

7. City restaurants are required to pay a $1,200 annual

license fee, the proceeds of which the city uses to fund

its restaurant inspection program. The license covers the

period July 1 through June 30. In 2014 the city collected

$120,000 in fees for the license period beginning July 1,

2014.

8. The city borrowed $300,000 in November 2014 to cover

a temporary shortage of cash. It expects to repay the

loan in February 2015.