Problem 1:
The New York Transit Authority was established as a separate government to maintain county highways. The road authority was granted statutory power to impose property taxes on county residents to cover its costs but it is required to balance its budget, which must be prepared on a cash basis. In its ?rst year of operations, it engaged in the following transactions, all of which were consistent with its legally adopted cash-based budget:
1. Purchased $20 million of equipment, all of which hadan anticipated useful life of 10 years. To ?nance the acquisition the authority issued $20 million in 10-yearterm bonds (i.e., bonds that mature in 10 years)
2. Incurred wages, salaries, and other operating costs, allpaid in cash, of $12 million
3. Paid interest of $1.0 million on the bonds
4. Purchased $1.8 million of additional equipment, payingfor it in cash; this equipment had a useful life of onlythree years
Required:
a. The authority's governing board levies property taxesat rates that will be just suf?cient to balance theauthority's budget. What amount of tax revenue willit be required to collect?
b. Assume that in the authority's second year of operations, it incurs the same costs, except that it purchasesno new equipment. What amount of tax revenue willit be required to collect?
c. Make the same assumption as to the tenth year, whenit will have to repay the bonds. What amount of taxrevenue will it be required to collect?
d. Comment on the extent to which the authority'sbudgeting and taxing policies promote interperiodequity. What changes would you recommend?
Problem 2:
A city engages in the transactions that follow. For each transaction indicate the amount of revenue or expenditure that it should report in 2014. Assume ?rst that the main objective of the ?nancial statements is to enable users to assess budgetary compliance. Then calculate the amounts, assuming that the main objective is to assess interperiod equity. The city prepares its budget on a ''modi?ed'' cash basis (that is, it expands the de?nition of cash to include short-term marketable securities), and its ?scal year ends on December 31.
1. Employees earned $256,000 in salaries and wages forthe last ?ve days in December 2014. They were paid onJanuary 8, 2015.
2. A consulting actuary calculated that per an acceptedactuarial cost method, the city should contribute$450,000 to its ?re?ghters' pension fund for bene?tsearned in 2014. However, the city contributed only$340,000, the amount budgeted at the start of the year.
3. The city acquired three police cars for $70,000 casheach. The vehicles are expected to last for three years.
4. On December 1, 2014, the city invested $198,000 inshort-term commercial paper (promissory notes). Thenotes matured on January 1, 2015. The city received$200,000. The $2,000 difference between the twoamounts represents the city's return (interest) on theinvestment.
5. On January 2, 2014, the city acquired a new $20 millionof?ce building, ?nancing it with 25-year serial bonds.
The bonds are to be repaid evenly over the period theyare outstanding-that is, $800,000 per year. The usefullife of the building is 25 years.
6. On January 3, 2014, the city acquired another $20million of?ce building, ?nancing this facility with 25 year term bonds. These bonds will be repaid entirelywhen they mature on January 1, 2039. The useful life ofthis building is also 25 years.
7. City restaurants are required to pay a $2,400 annuallicense fee, the proceeds of which the city uses to funditsrestaurantinspectionprogram.Thelicensecoverstheperiod July 1 through June 30. In 2014 the city collected$240,000 in fees for the license period beginning July 1,2014.
8. Thecityborrowed$600,000inNovember2014tocovera temporary shortage of cash. It expects to repay theloan in February 2015.