9-3
The differences in accounting for an activity in an internal service
fund rather than in the general fund may be striking.
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 following 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
1. For each of the following items indicate the amounts that
would be reported in the year-end financial statements
of : (1) the internal service fund, assuming that the school
district selected the first option, and (2) the general fund,
assuming that it selected the second option.
a. Billings to other departments (revenues)
b. Cost of supplies (expense or expenditure)
c. Expenses or expenditures relating to acquisition or
use of equipment
d. Other operating costs
e. Equipment (asset)
f. Accumulated depreciation
g. Inventory (asset)
h. Notes payable
i. Reserve for inventory
2. What would be the total expenses reported in the
internal service fund, assuming that the school district
selected the first option?
3. What would be the total amount of expenditures reported
in the general fund, assuming that the school district:
(1) selected the first option; (2) selected the second
option?
4. What would be the reported revenue and expenses
relating to the vehicle-repair shop in the district’s
government-wide statements? Would it matter whether
the district accounted for the shop in an internal service
fund or in the general fund?
How would you like us to help you with this assignment?
To answer the questions regarding the financial statements of the internal service fund and the general fund, we need to understand the differences between these two types of funds and the accounting principles applied. Let's break down each question and explain how to get the answers:
1. For each item, indicate the amounts that would be reported in the year-end financial statements of the internal service fund (option 1: internal service fund) and the general fund (option 2: general fund).
a. Billings to other departments (revenues):
- Internal service fund: The full amount billed to other departments ($19 million) would be reported as revenues.
- General fund: No revenues are reported for internal service activities in the general fund.
b. Cost of supplies (expense or expenditure):
- Internal service fund: The cost of supplies purchased ($4 million) minus the amount used ($3 million) would be reported as an expense ($1 million).
- General fund: No expenses are reported for internal service activities in the general fund.
c. Expenses or expenditures relating to the acquisition or use of equipment:
- Internal service fund: The full amount of other operating costs ($13 million), including costs related to equipment, would be reported as expenses.
- General fund: No expenses are reported for internal service activities in the general fund.
d. Other operating costs:
- Internal service fund: The full amount of other operating costs ($13 million) would be reported as expenses.
- General fund: No expenses are reported for internal service activities in the general fund.
e. Equipment (asset):
- Internal service fund: The equipment purchased ($24 million) would be reported as an asset.
- General fund: No assets are reported for internal service activities in the general fund.
f. Accumulated depreciation:
- Internal service fund: Accumulated depreciation would be calculated based on the useful life of the equipment (8 years with no residual value) and reported as a contra-asset.
- General fund: No accumulated depreciation is reported for internal service activities in the general fund.
g. Inventory (asset):
- Internal service fund: The value of any supplies remaining in inventory at the end of the year would be reported as an asset.
- General fund: No inventory is reported for internal service activities in the general fund.
h. Notes payable:
- Internal service fund: The long-term notes payable ($24 million) would be reported as a liability.
- General fund: No notes payable are reported for internal service activities in the general fund.
i. Reserve for inventory:
- Internal service fund: The internal service fund may choose to establish a reserve for inventory if deemed necessary. The specific amount would depend on the fund's policies and decision.
- General fund: No reserve for inventory is reported for internal service activities in the general fund.
2. To calculate the total expenses reported in the internal service fund:
- Add up the expenses or expenditures relating to the acquisition or use of equipment ($13 million) and other operating costs ($13 million).
- The total expenses reported in the internal service fund would be $26 million.
3. To determine the total amount of expenditures reported in the general fund:
- If the school district selected the first option (internal service fund), no expenditures would be reported in the general fund for the vehicle-repair shop.
- If the school district selected the second option (general fund), no expenditures would be reported in the general fund for the vehicle-repair shop.
4. The reported revenue and expenses relating to the vehicle-repair shop in the district's government-wide statements depend on how the district accounts for the shop, whether in an internal service fund or in the general fund. The government-wide financial statements consolidate all activities of the school district, including internal service funds. The specific revenue and expense figures would be derived from the internal service fund financial statements.
In summary, the differences in accounting for an activity in an internal service fund compared to the general fund can result in varying presentations of revenues, expenses, assets, and liabilities. The choices made by the school district regarding which option to select would impact the reported amounts in the financial statements. It's important for the school district to understand these differences and make a decision based on their reporting needs and objectives.