Question

The city of Kansas City establishes a delivery truck 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 following transactions:

It purchases equipment at a cost of $50 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 $8 million. Of these it uses $3 million. In its governmental funds, the district accounts for supplies on a purchases basis.

It incurs $15 million in other operating costs.

It bills other departments for $25 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. Record the transactions for the print shop assuming (1) the city selected the first option (2) the city selected the second option.

Answer 1

Option 1 - Accounting for Internal Service Fund

A) Fund Purchased Equipment by using cash it recieved from issuing Long term notes. Therefore, first we need to book Issue of Long term Notes and then book purchase of Equipment.

Entry would be Bank Account Debited with 50Million and Long term Notes Credited with 50Million.

Then , Equipment Debited with 50 Million and Bank Credited with 50Million.

B) Since equipment is getting depreciated in eight years. Therefore record depreciation in Income statement as expense. Amount of depreciation will 50/8 i.e. 6.25 millions.

Entry will be Income statement debited 6.25 mill and Accumulated Depreciation credited 6.25 Millions.

Note- This Accumulated Depreciation account will be shown as negative below Fixed Asset Account in our Balance Sheet.

C) Purchasing Of suuply will be booked as stock in usual accounting concepts. But in question it is given that govermnment funds of district accounts for supplies on purchases basis.

Income Statemnt Debited with 8 Million and Bank credited with 8 Million.

D) Other operating costs will also be recorded as Expense

Income Statement Debited with 15 Million and Bank Debited with million.

Note- I am assuming they incur the cost in cash. However, it may be provided that expense incurred in credit and then we have to use Accounts Payable Account instead of Bank account.

E) Billing other departments is our Revenue.

Income Statement Credited with 25 Million and Bank Debited with 25 Million.( Can be Accounts receivable if not received by Fund)

2. Accounting In General Fund

Since general fund accounts for all departments and If we choose to record Repair shop in General fund itself,then service provided by Repair shop will be booked as revenue against cost for other departments.

Other entries will remain same.