Question

On December 30, 2013, a county purchases a new snow plow for $100,000. On January 2, 2014, the snow plow is seriously damaged in an accident. The plow is uninsured. Soon after the accident, the county is able to sell the snow plow for $10,000.

a) Record the purchase of the snow plow in the county’s general fund.

b) Record the sale of the snow plow.

c) How would the sale of the snow plow affect the general fund’s operating statement?

d) How would the sale of the snow plow affect the governmental activities column of the government-wide statement of activities?

e) Explain the rationale for the difference between the information conveyed in the fund operating statement vs. the government-wide statement of activities in relation to the snow plow.

Answer 1

a) Dr. Expenditures $100,000

    Cr. Cash (or Accounts payable) $100,000

(b) Dr. Cash $10,000

     Cr. Other financing source - Sale of vehicle $10,000

(c) The amount of $10,000 i.e. other financing source would be an increase in current financial resources and reported below the revenue and expenditures sections. It would result to an increase the net change in fund balance for the year and the general fund year-end's balance.

d) The government-wide statement of activities would report a loss of $90,000 ( = cost of $100,000 minus sales price of $10,000). Please note that we are assuming that no depreciation has been charged,

e) The financial statements of government-wide are on full accrual/economic resources. Thus, the purchase of the snow plow leads to recording a capital asset of $100,000. With an assumption that no depreciation was recorded, the book value of the asset at the date of sale is $100,000. The sale proceeds of $10,000 leads to a loss to the county worth $90,000 (Journal entry: Dr. Cash $10,000; Dr. Loss on sale $90,000; Cr. Vehicles-snow plow $100,000. On the other hand, the general fund financial statements are on modified accrual/current financial resources. At the time of purchasing snow plow is written off to expenditures thus the book value of the plow at date of sale equals $0. Hence, the entire sale proceeds are an inflow of current financial resources of $10,000 with no offsetting reduction in recorded resources. It illustrates how the government-wide financial statements and the governmental fund financial statements are reporting different information as they consider the financial results of the same events from different perspectives.