Problem:
The differences in accounting for an activity in an internal service fund rather than 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 using the purchases method.
• 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
Question 1. For each of the following items, indicate the amounts that are reported in the year-end financial statements of (1) the internal service fund, assuming that the school district selects the first option, and (2) the general fund, assuming that it selects the second option.
1. Billings to other departments (revenues)
2. Cost of supplies (expense or expenditure)
3. Expenses or expenditures relating to acquisition or use of equipment
4. Other operating costs
5. Equipment (asset)
6. Accumulated depreciation
7. Inventory (asset)
8. Notes payable
9. Reserve for inventory
Question 2. What are the total expenses reported in the internal service fund, assuming that the school district selects the first option?
Question 3. What is the total amount of expenditures reported in the general fund, assuming that the school district: (1) selects the first option; (2) selects the second option?
Question 4. What are the reported revenue and expenses relating to the vehicle repair shop in the district's government-wide statements? Does it matter whether the district accounts for the shop in an internal service fund or in the general fund?