Question

The City of Wolfe has issued its financial statements for Year 4 (assume that the city uses a calendar year). The city’s general fund is made up of two functions: (1) education and (2) parks. The city also utilizes capital projects funds for ongoing construction and an enterprise fund to account for an art museum. It also has one discretely presented component unit.

The government-wide financial statements indicated the following Year 4 totals:

Education had net expenses of $618,000.

Parks had net expenses of $115,000.

Art museum had net revenues of $65,250.

General revenues were $832,750; the overall increase in net position was $165,000.

The fund financial statements issued for Year 4 indicated the following:

The general fund had an increase of $52,750 in its fund balance.

The capital projects fund had an increase of $57,250 in its fund balance.

The enterprise fund had an increase of $79,500 in its net position.

Officials for Wolfe define “available” as current financial resources to be paid or collected within 60 days.

On the first day of Year 4, the city receives a painting as a gift that qualifies as a work of art. It has a 30-year life, is worth $37,500, and is being displayed at one of the local parks. The accountant accidentally capitalized and depreciated it although officials had wanted to use the allowed alternative.

Respond to the following questions:

1. According to the information provided above, the general fund reported a $52,750 increase in its fund balance. If city officials had used proper alternatives in this reporting, what would have been the correct change in the fund balance for the general fund for the year?

2. According to the information provided above, the parks reported net expenses of $115,000. If city officials had used proper alternatives in this reporting, what was the correct net expense for parks for the year?

3. Assume the same information except that the art was given to the art museum but not recorded at all. What should have been the overall change in net position for Year 4 on government-wide financial statements, assuming that officials still preferred the allowed alternative?

Answer 1

Ans: 1.

The correct increase in fund balance is $52,750.

Explanation:

This gift did not involve a current financial resource and should not have been recorded in the fund financial statements ( for the governmental funds ). In this problem, nothing indicates that it was recorded in the fund financial statements. The recording of the asset and depreciation is only made in the government-wide statements. Thus, the increase in the fund balance of $52,750 was correct and should not be changed.

Ans: 2.

Net expense $151,250.

Explanation:

Apparently, in the government wide financial statements, revenue of $37,500 was reported when the asset was recognized at that value. Depreciation recognized for the first year would have been $1,250 ( $37,500 capitalized amount allocated over a 30 year life) so that an increase in the net position was reported as $36,250 ($37,500 - $1,250).

That was the result of the reporting process. If the allowed alternative had been followed as officials wished, both revenue and expense would have been increased initially by $37,500 for no net effect. The increase and decrease cancel out each other.

Consequently, removing the $36,250 increase that was reported (so that no net effect is shown) changes the net expense figure for this function from $115,000 to $151,250 ($115,000 + $36,250).

Ans: 3.

The correct increase in net asset is $165,000.

Explanation:

Government officials wanted to use the alternative which was to record an expense (rather than an asset) along with a revenue for the donation. However. no entry was made by the art museum.

Thus, there was no change created in the net position figure.Had the desired entry been made, both revenue and expense would have risen by $37,500, but then, again, no net effect would result because they would have off set each other.

Although the individual totals are wrong, the increase in net position stays at $165,000.