Question

A school district establishes a vehicle repair shop that provides service to other departments, all of which are accounted for in its general fund. During its first year of operations the shop engages in the fol-lowing transactions:

• It purchases equipment at a cost of $24 million and issues long-term notes for the purchase price. The useful life of the equipment is eight years, with no residual value.

• It purchases supplies at a cost of $4 million. Of these it uses $3 million. In its governmental funds, the district accounts for supplies on a purchases basis.

• It incurs $13 million in other operating costs.

• It bills other departments for $19 million.

For purposes of external reporting, school district officials are considering two options:

• Account for the vehicle repair shop in an internal service fund

• Account for the vehicle repair shop in the general fund

Please prepare the journal entries under the two assumptions. First assume the transactions are recorded in an internal service fund; and then assume the transactions are reported in the general fund.

Answer 1

Journal entries to record the transactions in an internal service fund
	Amount in millions
Equipment	$24
Long term notes payable		$24
(To record purchase of equipment)
Supplies Expenses	$4
Cash		$4
(To record purchase of supplies)
Operating Expenses	$13
Cash		$13
(To record operating costs)
Due from other departments	$19
Service Revenue		$19
(To record due from other departments)
Depreciation-equipment	$3
Accumulated Depreciation-equipment		$3
(To record depreciation on equipment on straight line basis)
Inventory for Supplies	$1
Reserve for Inventory for supplies		$1
(To record increase in inventory at year end)
Journal entries to record transactions in the general fund
Expenditure-Equipment	$24
Other Financial Sources		$24
(To record purchase of equipment by issuing long term notes)
Expenditure-Supplies	$4
Cash		$4
(To record purchase of supplies)
Expenditure-Operating cost	$13
Cash		$13
(To record operating expenses)
Due from other departments	$19
Revenue-service		$19
(to record billing to other departments)