posted by brandee .
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
• 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
• Account for the vehicle-repair shop in the general
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
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?
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