berry0331
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Joined: 04 Sep 2011
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Posts: 49
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| Posted: 08 May 2012 at 18:58 | IP Logged
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Those questions involve proprietary funds. From what I know Internal
service and enterprise fund both use full accrual and economic financial
resource focus. Since the equipment under enterprise fund is capitalized,
does that apply to the internal service?
Question CPA-01191
Rock County has acquired equipment through a noncancelable lease-
purchase agreement dated December 31, Year 0. This agreement requires
no down payment and the following minimum lease payments:
December 31
Year 1 Principal $50,000
Interest 15,000
Total 65,000
Year 2 Principal 50,000
Interest 10,000
Total 60,000
Year 3 Principal 50,000
Interest 5,000
Total 55,000
If the equipment is used in enterprise fund operations and the lease
payments are to be financed with enterprise fund revenues, what account
should be debited for $150,000 in the enterprise fund at inception of the
lease?
a. Expenses control.
b. Expenditures control.
c. Other financing sources control.
d. Equipment
Explanation
Choice "d" is correct. Equipment acquired through a "capital lease"
arrangement should be accounted for as equipment.
Choices "a" and "b" are incorrect. The lease payments are for a capital
item, not an "expense" item. Choice "c" is incorrect. Lease payments are
not revenue items, i.e., other financing sources.
Same situation but a different question:
If the equipment is used in internal service fund operations and the lease
payments are financed with internal service fund revenues, what account
or accounts should be debited in the internal service fund for the
December 31, Year 1 lease payment of $65,000?
a. Expenditures control $65,000
b. Expenses control $65,000
c. Capital lease payable $50,000
Expenses control 15,000
d. Expenditures control $50,000
Expenses control 15,000
Explanation
Choice "c" is correct. The equipment (capital) lease payment made one
year after acquisition by the internal service fund should be recorded as
follows:
DR Capital lease payable (principal) 50,000
DR Expenses control (interest) 15,000
CR Cash 65,000
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Topic: Governmental accounting
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