Question

P. 9-3

The differences in accounting for an activity in an internal service fund rather than in the general fund may be striking.

A school district establishes a vehicle repair shop that provides service to other departments, all of which are accounted for in its general fund. During its first year of operations the shop engages in the fol- lowing transactions:

• It purchases equipment at a cost of $24 million and issues long-term notes for the purchase price. The useful life of the equipment is eight years, with no residual value.

• It purchases supplies at a cost of $4 million. Of these, it uses $3 million. In its governmental funds, the district accounts for supplies on the basis of a purchase.

• It incurs $13 million in other operating costs.
• It bills other departments for $19 million.
For purposes of external reporting, school district officials are considering two options: • Account for the vehicle repair shop in an internal service fund.
• Account for the vehicle repair shop in the general fund.

1. For each of the following items indicate the amounts that would be reported in the year-end financial statements of: (1) the internal service fund, assuming that the school district selected the first option, and (2) the general fund, assuming that it selected the second option.

   1. Billings to other departments (revenues)

   2. Cost of supplies (expense or expenditure)

   3. Expenses or expenditures relating to acquisition or use of equipment

   4. Other operating costs

   5. Equipment (asset)

   6. Accumulated depreciation

   7. Inventory (asset)

   8. Notes payable

   9. Nonspendable fund balance (for inventory)

2. What would be the total expenses reported in the internal service fund, assuming that the school district selected the first option?

3. What would be the total amount of expenditures reported in the general fund, assuming that the school district: (1) selected the first option; (2) selected the second option?

4. What would be the reported revenue and expenses relating to the vehicle-repair shop in the district’s government-wide statements? Would it matter whether the district accounted for the shop in an internal service fund or in the general fund?

Answer 1

In the first case , in case the school district opt for option 1 i.e account for the vehicle repair shop in an internal service fund the external reporting figures wil be as follows:-

1.) Billings to other department:- Under  internal service fund accounting the billing to other department will be based on the cost recovery (total of costs) which is cost of supplies+ other operating costs =$3Mn+$13Mn= $16Mn.Depreciation cost is not recovered in internal service fund accounting.

2.) Cost of supplies will be $3 Million as this the quantity of material consumed out of $4 million purchased.

3) expenses relating to acquisiton or use of equipment will be the depreciation part of the asset calculated on straight line basis i.e Cost/useful life $24 Mn /8 yrs which will be $3Mn

4) Other operating cost reported at $13 mn

5) Equipment will be reported at the value of cost less accumulated depreciation which is $24 Mn less $3 mn of depreciation amounts to $21Mn.

6) Accumulated depreciation is the depreciation for the first year ie $3mn.

7) Inventory(Balance) at cost of $1 Mn ( $4mn-$3Mn)

8) Notes payable $24 mn which is the cost of equipment purchased .

9) Non spendable fund balance for inventory will be $4mn

Total expense reported if the school district selects first option is Cost of supplies+other operating costs+depreciation which is $3+$13 Mn+ $3Mn = $19 Mn.

In case if the school district chooses second option the following figures will change and all other would remain same.

1) Billing to other departments will be the bill amount of $19Mn.

2) cost off supplies will be the purchase cost of supplies instead of material consumed which amounts to $4Mn.

Rest all the figures would remain as same in first option.

Total expense if school district selects second option will be purchase cost of supplies+other operating cost+depreciation i.e $4Mn+$13Mn+$3Mn= $20Mn.

Total amount of expenditure reported in general fund will be $4Mn(Supplies)+$24 Mn(Equipment)+$13Mn(Operating costs) which is $41 Mn in both the options.

Total revenue reported $19Mn and Total expense reported $19Mn this will not change in both the cases. The figures will not be impacted in either of the options.