Question

The City of Sandstorm purchased a swimming pool from a private operator as of April 1, 2020, for $600,000, of which $300,000 was provided by a one-time contribution from the General Fund, and $300,000 was provided by a loan from the Great National Bank, secured by a note.

The loan has an annual interest rate of 6 percent, payable semiannually on October 1 and April 1; principal payments of $100,000 are to be made annually, beginning on April 1, 2021. The City has a calendar year as its fiscal year.

During the year ended December 31, 2020, the following transactions occurred related to the City of Sandstorm Swimming Pool:

1. The amounts were received from the City General Fund and the Great National Bank.

2. A loan was provided in the amount of $130,000 from the Water Utility Fund to provide working capital.

3. The purchase of the pool was recorded. Based on an appraisal, it was decided to allocate $150,000 to the land, $210,000 to improvements other than buildings (the pool), and $90,000 to the building.

4. Charges to patrons during the season amounted to $238,000, all received in cash.

5. Salaries paid to employees amounted to $120,000, all paid in cash, of which $90,000 was cost of services and $30,000 was administration.

6. Supplies purchased amounted to $40,000; all but $5,000 was used. Cash was paid for the supplies, all of which was for cost of sales and services.

7. Administrative expenses amounted to $18,500, paid in cash.

8. The first interest payment was made to the Great National Bank.

9. The short-term loan was repaid to the Water Utility Fund.

10. Depreciation of $21,500 for the pool and $7,000 on the building was recorded for the nine months they were in operation. 11. Interest was accrued for the year. 12. Closing entries were prepared.

Required:

a. Prepare entries to record the transactions.

b. Prepare a Statement of Revenues, Expenses, and Changes in Fund Net Position for the year ended December 31, 2020, for the City of Sandstorm Swimming Pool Fund.

c. Identify the types of nonexchange revenues that are most likely to result in differences in the timing of recognition between the accrual and modified accrual bases of accounting.

Answer 1

a. Prepare entries to record the transactions.

Answer:

No.	General Journal	Debit	Credit
1	Cash	600,000
	Transfers in		300,000
	Notes Payable		300,000
	To record amounts were received from the City General Fund and the Great National Bank
2	Cash	130,000
	Due to Water Utility Fund		130,000
	To record loan from Water Utility Fund
3	Land	150,000
	Improvements	210,000
	Building	90,000
	Cash		450,000
	To record purchase of the pool and allocation
4	Cash	238,000
	Operating Revenues - charges for sales and services		238,000
	To record receipt of charges to patrons
5	Operating expenses-cost of sales and services	90,000
	Operating expenses-administration	30,000
	Cash		120,000
	To record payment of salaries and administration
6	Materials and Supplies	40,000
	Cash		40,000
	To record supplied purchased
	Operating expense-cost of sale and services	35,000
	Materials and supplies		35,000
	To record cost of sales and services
7	Operating expenses-administration	18,500
	Cash		18,500
	To record payment of administrative expenses
8	Nonoperating expense-interest	9,000
	Cash		9,000
	To record interest payment to Great National Bank.
9	Due to water Utility Fund	130,000
	Cash		130,000
	To record repayment of short-term loan to Water Utility Fund
10	Operating expense-depreciation	28,500
	Accumulated depreciation-improvements		21,500
	Accumulated depreciation-building		7,000
	To record depreciation
11	Nonoperating expense-interest	4,500
	Accrued interest payable		4,500
	To record interest accrued
12	Operating Revenue - charges for sales and services	238,000
	Transfers in	300,000
	Operating expenses-cost of sales and services		125,000
	Operating expenses-administration		48,500
	Operating expense-depreciation		28,500
	Non-operating expenses		13,500
	Net position		322,500
	To record closing entries

Calculation:

Entries except the below calculated ones doesnt require any calculations as the amount could be directly taken from the transaction provided.

Entry 6:

Supplies purchased = $40,000

Used supplies = 5,000

So, the second entry amount :

Operating expense-cost of sale and services = 40,000 - 5,000 = 35,000

Entry 8:

Annual interest rate = 6 percent

Payment intervel = payable semiannually on October 1 and April 1

Nonoperating expense-interest = 300,000*6% * 6/12 = 9,000

Entry 11:

To calculate accrued interest:

Accrual for 3 months

Annual interest rate = 6 percent

Nonoperating expense-interest = 300,000*6% * 3/12 = 4,500

Entry 12:

Closing Entries:

Operating expenses-cost of sales and services = 90,000 + 35,000 = 125,000

Operating expenses-administration = 30,000 + 18,500 = 48,500

Non-operating expenses - Interest = 9,000 + 4,500 = 13,500

Net position = Operating Revenue - charges for sales and services + Transfers in - Operating expenses-cost of sales and services - Operating expenses-administration - Operating expense-depreciation - Non-operating expenses = 238,000 + 300,000 - 125,000 - 48,500 - 28,500 - 13,500 = 322,500

b. Prepare a Statement of Revenues, Expenses, and Changes in Fund Net Position for the year ended December 31, 2020, for the City of Sandstorm Swimming Pool Fund.

Answer:

City of Sandstorm
Swimming Pool Fund
Statement of Revenues, Expenses, and Changes in Fund Net Position
Year ended December 31, 2020
Operating Revenues:
Charges for Sales and Services		238,000
Operating Expenses:
Costs of Sales and Services	125,000
Administration	48,500
Depreciation	28,500	202,000
Operating Income		36,000
Non-operating Expenses:
Interest		(13,500)
Income Before Transfers		22,500
Transfer From General Fund		300,000
Change in Net Assets		322,500
Net Assets – January 1, 2020		0
Net Assets- December 31, 2020		322,500

Explanation

To prepare the Statement of Revenues, Expenses, and Changes in Fund Net Position, first we need to identify the revenues. Here, it will be the Charges for Sales and Services which were receieved as charges to patrons. Then we need to deduct the Operating Expenses, which are Costs of Sales and Services, Administration and Depreciation.

Then we get the Operating Income. And there are Non-operating Expenses which we need to deduct like interest. After that we get Income Before Transfers. And there is a transfer in amount, which need to be shown as Transfer From General Fund. Adding both Income Before Transfers and Transfer From General Fund will give the Change in Net Assets.

c. Identify the types of nonexchange revenues that are most likely to result in differences in the timing of recognition between the accrual and modified accrual bases of accounting.

Answer:

There are four types. They are Derived tax revenue, imposed nonexchange revenues, Government-mandated non - exchange transactions and Voluntary nonexchange transactions. The derived tax revenue includes income taxes and sales taxes etc. Imposed nonexchange revenues are due to the results of assessments put on to the non - governmental entities which includes the property taxes. Government-mandated non - exchange transactions happen because the government gives resource to another to meet thie specific purpose like federal programs.
Voluntary nonexchange transactions are due to legislative agreements for grants and private donations.