Question

A city starts a solid waste landfill that it expects to fill to capacity gradually over a 21-year period. At the end of the first year, it is 13 percent filled. At the end of the second year, it is 29 percent filled. Currently, the cost of closure and postclosure is estimated at $1 million. None of this amount will be paid until the landfill has reached its capacity.

If this landfill is judged to be a proprietary fund, what liability will be reported at the end of the second year on fund financial statements?

Multiple Choice

• $290,000.

• $160,000.

• $0.

• $300,000.

Answer 1

Proprietary fund :

First, we must analysis the concept of proprietary fund as this concept is very useful as per the problem.

A Proprietary Fund is used in governmental accounting to account for activities that involve business like interaction, either within the government or outside the government. There are two types of proprietary fund are used these are enterprise fund and internal service fund.

An enterprise fund is used to account for any activity for which external users are charged a fees for goods and services on the other hand, internal service fund is used for activity that provide goods and services to other fund.

Proprietary fund are a government tool for keeping track of the money involved. When the government draw up its financial statement it treats each enterprise fund separetely. All the internal service fund are aggregated together in the statement.

Here, the option first is correct as $290,000 ($1,000,000 x 29%) is the liability which shows in th firms financial statement. Although the payment is not realised until completion of the work.

At the end of the year second 29% is only work completed so, out of total payments of $1 million 29% is the liability arises only for internal purpose. For control purpose this amount is set a side and is used for future purpose and utisized for payments, may be used as sinking fund investment and earned interest for rest of the period.