Question

Exchange vs Nonexchange Transactions

Classify each transaction below as exchange or nonexchange. If it is a nonexchange transaction, classify it in one of the four categories of nonexchange transactions. Explain your answer.

1. Merchant collects state cigarette tax on sale of a pack of cigarettes.

2. State reimburses schools for costs related to special education of handicapped children. The school must verify eligibility of the children.

3. State fines for hunting illegally on protected state wildlife preserve.

4. City property taxes are paid by owner.

5. Hotel tax is collected at checkout.

6. Donor provides $300,000 to a city homeless shelter and specifies $100,000 may be spent each year.

7. County landfill collects fee from citizen dumping trash.

8. Income tax is withheld from an employee's paycheck.

9. A business donates cash for scholarships to a public university and specifies the scholarships must be for study abroad.

10. A corporation makes a grant to a public university to conduct research on genetics coding, and the university agrees to give the corporation all patent rights on results of the genetic coding research.

Answer 1

Exchange transactions:

Exchange transactions are those where each party receives and gives the equal worth of valuables in exchange to each other.

Non Exchange transactions:

These transactions are where government givs or receives value without directly receiving or giving equal value in return.

The four classes of non exchange transactions are:

1. Derived tax revenues, These are taxes imposed from the income derived and on the exchange transactions example, income tax, sales tax etc.
   
2. Imposed nonexchange revenues, Taxes like property tax, fines etc.
   
3. Government-mandated nonexchange transactions, which occur when a government at one level provides resources to a government at another level and requires the recipient to use the resources for a specific purpose (for example, federal programs that state or local governments are mandated to perform)
   
4. Voluntary nonexchange transactions, which result from legislative or contractual agreements, other than exchanges, entered into willingly by the parties to the agreement (for example, certain grants and private donations).

Classification of the transaction:

1. Merchant collects state cigarette tax on sale of a pack of cigarettes. :

  This is a non exchange transaction as the State cigarette tax is the revenue of the government. This tax is resulting from the taxable exchange that is saleo f cigarettes and hence is a Derived Tax revenue of Non exchange transactions

2. State reimburses schools for costs related to special education of handicapped children. The school must verify eligibility of the children.

This is a voluntary non exchange transaction as this is in the from of grant for some special need provided to the school from government.

3. State fines for hunting illegally on protected state wildlife preserve.

  This is Imposed non exchange transaction as this is in the form or penalty.

4. City property taxes are paid by owner.

  This is Imposed non exchange transaction as this is in the property tax and the tax liability is not a result of the taxable exchange transaction.

5. Hotel tax is collected at checkout.

   This is a non exchange transaction as the Hotel tax is the revenue of the government. This tax is resulting from the taxable exchange that is saleo f cigarettes and hence is a Derived Tax revenue of Non exchange transactions

6. Donor provides $300,000 to a city homeless shelter and specifies $100,000 may be spent each year.

  This is a voluntary contribution and with an agreement that $100,000 are spent each year. Hence the category would be Voluntary non exchange transactions.

7. County landfill collects fee from citizen dumping trash

  This is a Imposed non exchange transaction as the fee is in the form of penalty for dumping trash against the rules and there is no exchange of equal worth involved.

8. Income tax is withheld from an employee's paycheck.

  Income tax is Derived tax revenue transaction as the tax is a result of taxable exchange of the services of the employee to the company against the salaries paid.

9. A business donates cash for scholarships to a public university and specifies the scholarships must be for study abroad.

Voluntary contribution for abroad studies to university (Which is an agreement) is in the nature of the Voluntary non exchange transaction.

10. A corporation makes a grant to a public university to conduct research on genetics coding, and the university agrees to give the corporation all patent rights on results of the genetic coding research.

  This is a Exchange transaction, as the corporation who is providing the grant is receiving the patents of the results of the research in exchange which can be considered as equal worth exchange.