Question

P. 1–1 Budgeting practices that satisfy cash requirements may not promote interperiod equity. The Burnet County Road Authority was established as a separate government to maintain county high- ways. The road authority was granted statutory power to impose property taxes on county residents to cover its costs, but it is required to balance its budget, which must be prepared on a cash basis. In its rst year of operations it engaged in the following transactions, all of which were consistent with its legally adopted cash‐based budget:

1. Purchased $10 million of equipment, all of which had an anticipated useful life of 10 years. To nance the acquisition the authority issued $10 million in 10‐year term bonds (i.e., bonds that mature in 10 years)

2. Incurred wages, salaries, and other operating costs, all paid in cash, of $6 million

3. Paid interest of $0.5 million on the bonds

4. Purchased $0.9 million of additional equipment, paying for it in cash; this equipment had a useful life of only three years

a. The authority’s governing board levies property taxes at rates that will be just suf cient to balance the authority’s budget. What amount of tax revenue will it be required to collect?

b. Assume that in the authority’s second year of operations, it incurs the same costs, except that it pur- chases no new equipment. What amount of tax revenue will it be required to collect?

c. Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect?

d. Comment on the extent to which the authority’s budgeting and taxing policies promote interperiod equity. What changes would you recommend?

Answer 1

a.The authority's governing board levies property taxes at rates that will be just sufficient to balance the authority's budget. What amount of tax revenue will it be required to collect?

Ans:The total amount of tax revenue that it will be required to collect is $7.4 million. This number is derived through adding up the cash outlays/expenditures that were incurred as part of its legally adopted cash-based budget. This consists of the $6 million that was incurred for wages, salaries, and other operating costs, the $0.5 million that was used to pay interest on the bonds, and lastly the $0.9 million that was used to purchase additional equipment. Thus the total of this is $7.4 million, which will be required to be collected through levying property taxes in order to balance the budget.

b.Assume that in the authority's second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue will it be required to collect?

Ans. 6.0 million + 0.5 million = 6.5 million

c.Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect?

Ans:6.0 million + 0.5 million + 10.0 million = 16.5 million

d.Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend?

Ans:It would be wise to amortize the bonds payable over the period of ten years. By doing so, there would be less of a tax burden on current and future taxpayers for the maintenance of county highways. This example displays poor inter period equity as it is placing the tax burden upon future taxpayers over the course of just one year.