Second project: P. 2-7: Is fund accounting less appropriate for


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Second project: P. 2-7: Is fund accounting less appropriate for businesses than for not-for-profits? (80 Points) Scenario 1: A newly formed not-for-profit advocacy organization, the Center for Participatory Democracy, requests your advice on setting up its financial accounting and reporting system. Meeting with the director, you learn the following: Member dues can be expected to account for approximately 80 percent of the organization’s revenues. The organization plans to seek grants from private foundations to carry out research projects pertaining to various political causes. The center has already received a gift of $100,000. The donor specified that the funds are to be placed in investment-grade securities and that only the income is to be used to support center activities. The center leases office space but owns its furniture, fixtures, and office equipment. The center has taken out a five-year term loan of $100,000. Although the loan is not due until its term expires, the organization intends to set aside $17,740 each year with the prospect that, properly invested, and these payments will provide the necessary $100,000. Instructions: Do you believe that the center should establish its accounting system on a fund basis? If so, why? Assume you answered ‘‘yes’’ to question 1. What specific fund types do you think the center should set up? Explain. Alternatively, suppose the center was a privately owned, profit-oriented consulting firm that provided political advice to its clients. The firm would charge its clients a fixed fee each month in return for which they would receive periodic newsletters and the opportunity to meet with the firms’ partners. In addition, the firm expects to enter into contracts to carry out specific research projects for its clients. Would you now recommend that the firm establish its accounting system on a fund basis (assuming, of course, that it would prepare its external financial reports in accordance with generally accepted accounting principles applicable to businesses)? Explain. P. 5-5: Can a government sell assets to itself to generate revenue? (80 points) Scenario 2: A city is having fiscal problems in 2015. It expects to report a deficit in its general fund, the only fund that is statutorily required to be balanced. To eliminate the anticipated defecate the city opts to ‘‘sell’’ its city hall—to itself—for $5 million. The city establishes a ‘‘capital asset financing agency.’’ The agency is a separate legal entity but will have to be reported as a component unit. As such it will be accounted for in a fund other than the general fund. The city structures the transaction as follows: The financing agency pays the city $5 million in 2015 in exchange for ‘‘ownership’’ of city hall. The city hall has been carried as general capital asset. The agency acquires the necessary cash by issuing 20-year, 6 percent notes. The notes will be repaid in twenty annual installments of $435,920. The notes are guaranteed by the city at large. Hence, they are ultimately a liability payable from the general fund. The agency leases the city hall back to the city at large. Lease payments are to be paid out of general fund resources. Instructions: Prepare journal entries in the general fund to record the sale and concurrent lease-back of the city hall. The lease-back satisfies the criteria of a capital lease transaction. Prepare journal entries in the general fund to record the first lease payment, which was made in 2015. Will the transaction, in fact, reduce the 2015 anticipated fund deficit? Briefly justify the accounting principles that underlie this type of accounting. EX. 10-7: Nonexpendable fiduciary funds should be accounted for on a full accrual basis. (70 points) Scenario 3: The Nebraska Institute of Science (NIS) pools all of its endowment funds so that it can obtain the benefits of a large and diverse investment portfolio. The institute recently acquired a commercial office building as an investment property

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